The Growth Effects of Current Account Reversals

This paper assesses empirically whether or not current account reversals have permanent growth effects and the role of macroeconomic policies in this process. The methodology developed in de Mello, Padoan and Rousova (2010) to identify a chronology of current account reversals is applied to the real growth rate of GDP of more than 100 countries during the period 1971-2007. We use ordered probit models to show that current account reversals associated with improvements in external positions increase the probability of a sustained rise in the rate of growth of GDP (growth acceleration) beyond those generated by real exchange rate effects. Current account reversals associated with a deterioration of external positions make impending GDP accelerations less likely. The macroeconomic policy stance prevailing at the time of current account reversals also matters. High budget deficits thwart the positive effect of a current account improvement on the probability of a growth acceleration. By contrast, a monetary tightening in association with a current account deterioration makes an impending growth acceleration more likely. This paper improves our understanding of how macroeconomic policies help countries maximise the growth payoff of current account improvements.