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This paper was prepared for the European Economic Association Congress held in Toulouse, Aug. 30- Sept. 2, 1997. The authors are grateful to Andy Rose for useful discussions on the subject and for sharing his data and STATA programs, and to Philip Lane, Alessandro Prati, and Ratna Sahay for comments and suggestions. Yael Edelman and Manzoor Gill provided excellent research assistance.
See Edwards (1989) for an analysis of devaluation episodes in developing countries and their consequences for output and the current account.
Throughout the paper we use the term “reversal” to indicate a large reduction in current account deficits.
We also require the current account deficit to be reduced to below 10 percent (or, alternatively, by at least a third) so as to avoid capturing reductions in deficits from, say, 25 to 22 percent of GDP.
Our definition of events is similar to the one used by Alesina and Perotti (1997) for fiscal stabilizations.