Sustainable and Excessive Current Account Deficits
Cite this article as: Reisen, H. Empirica (1998) 25: 111. doi:10.1023/A:1006850620095 Abstract
Both the Mexican crisis of 1994–95 and the Asian financial crisis of 1997–98 have been preceded by large current account deficits run by the affected economies. External deficits are often assumed to play an important role in the propagation of financial crises in emerging markets. Policymakers are faced with a new challenge: that of resisting or accepting the large current account deficits that may result from heavy private capital inflows. This paper aims at providing some guidance:
First, the Lawson Doctrine – according to which current account deficits that result from a shift in private-sector behaviour should not be a public policy concern – has been discredited by recent currency crises in Latin America and Asia. Second, define the size of current account deficits that should be sustainable in the long run. Third, the intertemporal approach to the current account does not provide a reliable benchmark to define when deficits become ‘excessive’. Fourth, large external deficits should be resisted if unsustainable currency appreciation, excessive risk-taking in the banking system and a sharp private spending boom are seen to coincide.
Current account deficits private capital flows References
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