Determinants and Costs of Current Account Reversals under Heterogeneity and Serial Correlation
No 2007-17, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics
Recent empirical evidence suggests that reversing current account balances imply costly adjustment processes leading to reduced economic growth. Using large panel data sets to analyze determinants and costs of reversals asks for controls of heterogeneity among countries. This paper contributes a Bayesian analysis, which allows a parsimonious yet flexible handling of country specific heterogeneity via random coeffcients. Furthermore, the analysis allows for serially correlated errors in order to capture persistence within the employed macroeconomic data. Bayesian specification tests provide evidence in favor of models incorporating heterogeneity and serial correlation. The results suggest that consideration of serial correlation and heterogeneity is necessary to assess correctly the determinants and costs of reversals. Results are checked for robustness against the underlying reversal definition.
Keywords: Current account reversals; Bayesian Analysis; Panel Probit Model; Panel Treatment Model; Random Parameters; Serial Correlation (search for similar items in EconPapers)
JEL-codes: F32 F43 C33 C35 C30 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:5683
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