Rapid Current Account Adjustments: Are Microstates Different?

September 1, 2008

Preview Citation

Format: Chicago

Patrick A. Imam Rapid Current Account Adjustments: Are Microstates Different?, (USA: International Monetary Fund, 2008) accessed September 19, 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

We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications.

Subject: Current account, Exports, Imports, Real effective exchange rates, Terms of trade

Keywords: CA adjustment, CA deficit, CA improvement, Current account problem, GDP ratio, Widening current account, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/233
Stock No:

WPIEA2008233
ISBN:

9781451870916
ISSN:

1018-5941

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