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The Effects of Financial Crises on the Current Account Balance

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posted on 28.06.2013, 00:00 authored by Yu Chen
This study investigates the effects of banking crises on the current account, using a panel data set of eighty countries over the 1980-2001 period. I adopt a dynamic regression approach and derive impulse response functions that estimate the detailed dynamic responses of the Current-Account-Balance-to-GDP ratio to a banking crisis. I find that banking crises produce current account effects that are substantial and vary over time, which suggests that, by omitting the dynamics, the cross-sectional regressions of most of the literature can be misleading. In particular, my estimates suggest that a banking crisis is followed by an improvement of the current account balance that is sizable and statistically significant. This effect is shown to be temporary, however, lasting for a few years before it dies out in the long run. These results are robust to a number of different specifications. This study also discusses a few interesting extensions related to currency crises and twin crises.



Karras, George



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University of Illinois at Chicago

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Committee Member

Officer, Lawrence Stokes, Houston Lee, Jin Man Pieper, Paul

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