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César Calderón: University of Rochester; Alberto Chong: The World Bank and Georgetown University; Luisa Zanforlin: International Monetary Fund. We would like to acknowledge comments and suggestions from Norman Loayza and Sergio Pereira Leite.
Countries are assigned to regions according to standard World Bank classification.
It is also positive but statistically nonsignificant for North Africa.
Also, balance of payments controls are positive and statistically significant for North Africa.
The current account deficit, as defined in Table 1, implies that positive (negative) numbers indicate a deficit (surplus).
That is, we are not decomposing for long-term, permanent effects.
The value of the coefficient for lagged CAD implies that the half-life of transitory shocks on the current account deficit is about six years.
The low persistence of current account deficits in Africa may be linked to the occurrence of the high levels of foreign debt in the context of the region’s low growth. CAD in an African country is expected to be adjusted more quickly than in an average developing country as the stock of debt makes an open position unsustainable, even in the very short term. This hypothesis is supported by the fact that, when debt is included among the regressors, the lagged CAD (persistence) becomes non significant. See column [3a] in Table 4.
This is consistent with a situation in which “productive” imports are manufactured domestically. For instance, machinery might be tied to investment projects that are not sensitive to domestic conditions.
The impact of public savings (and government expenditures) is larger than the impact of private savings on CAD in both samples. Countries with large (external and internal debts) have a greater need for adjustment; thus fiscal adjustments may affect even more the external gap. In other words, the strength of the link between the fiscal deficit and current account deficit depends on the level of debt of the country.
These additional regressions, though not reported, are available upon request.
However, for the full sample, the direction of the effect is reversed. An equivalent increase in the black market premium will yield a reduction of 0.40 percent for the full sample.
However, the developing country sample is significant at 10 percent. Notice that our proxy for balance of payment controls exhibits small variation over time and does not measure accurately the intensity of controls, only their presence (Grilli and Milesi-Ferreti, 1995).
Terms of trade are constructed from price indexes (in U.S. dollars) for exports and imports from the World Bank (1997).
Temporary output surges in industrial economies lead to a reduction of current account deficits of African economies because of the increasing demand for their exports.
This section draws heavily from Calderón, Chong and Loayza (1999). Also, we would like to thank Norman Loayza who generously contributed to this section.
For instance, Holtz-Eakin, Neway, and Rosen, (1988), Arellano and Bond (1991), Kiviet (1995), Alonso-Borrego and Arellano (1999), Arellano and Bover (1995), Blundell and Bon (1997), and Ziliak (1997).
Alonso-Borrego and Arellano (1999) and Blundell and Bond (1997) show that when the lagged dependent and the explanatory variables are persistent over time, lagged levels of these variables are weak instruments for the regression equation in differences. This weakness has repercussions for both the asymptotic and small-sample performance of the differences estimator. As persistence increases, the asymptotic variance of the coefficients obtained with the differences estimator rises (i.e., deteriorating its asymptotic precision). Furthermore, Monte Carlo experiments show that the weakness of the instruments produces biased coefficients in small samples. This is exacerbated with the variables’ over-time persistence, the importance of the specific effect, and the smallness of the time-series dimension.
Given that lagged levels are used as instruments in the differences specification, only the most recent difference is used as instrument in the levels specification. Other lagged difference