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| Number: | 07-16 |
| Author: | |
| Issue Date: | October 2007, revised September 2009 |
| Abstract: | We empirically investigate the effect of net external debts on the size of medium- term current account balances. We utilize an approach where net external debt positions behave like a shadow interest rate" in affecting the current account imbalances. In a simple accounting framework, we find supportive evidence of the adjustment role of the net external debt positions on the current account bal- ances. Our findings show that net external debt holdings affect current account imbalances through their effect on domestic investment and private consump- tion. Government expenditures, on the other hand, isn't affected by net external debt holdings. We also find that developing (OECD) countries in the sample would have run higher current account deficits (surpluses) in the absence of the negative impact of net external debt positions on investment and consumption. Net external debt positions, therefore, reduce the dispersions of current account imbalances, thus, increase the correlation of investment and saving ratios. |
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