External Balance in Low Income Countries

By Lone Engbo Christiansen, Alessandro Prati, Luca A Ricci, Thierry Tressel

October 1, 2009

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Lone Engbo Christiansen, Alessandro Prati, Luca A Ricci, and Thierry Tressel. External Balance in Low Income Countries, (USA: International Monetary Fund, 2009) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.

Subject: Capital account liberalization, Current account, Foreign assets, Personal income, Real exchange rates

Keywords: Current account balance, Emphasizing saving, Fiscal policy, Income effect, Terms of trade goods, Trade balance, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/221
Stock No:

WPIEA2009221
ISBN:

9781451873689
ISSN:

1018-5941

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