Estimation and prediction of current account deficit adjustment dynamics

Abstract

This article studies the adjustment dynamics of the current account deficit on an annual data set of 136 advanced and emerging economies over the period 1975-2018. Its objective is to assess whether the initial macroeconomic conditions enable us to anticipate if the current account reversal will be disruptive for economic growth. Binomial and multinomial logit models and decision trees are estimated to identify the determinants and to predict the different types of reversals. It is found that external variables, such as the terms of trade and international liquidity conditions, and variables associated with domestic policies, such as credit growth, the output gap and the real exchange rate, allow us to anticipate the type of current account reversal. In this sense, the importance of fiscal, exchange and macroprudential policies tending to moderate the fluctuations of the economic cycle and to limit excessive credit expansion, the procyclicality of capital flows and the appreciation of the real exchange rate is highlighted.

Date of presentation: 03-20-2021

Date of approval: 02-17-2022

JEL classification: F32, F34, C38