Does the Current Account Matter?

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Abstract
This chapter examines the behavior of the current account in emerging nations, and in particular its role in financial crises. In the aftermath of the Mexican crisis, many analysts argued that the so-called “new” view of the current account, based on Lawson's Doctrine, was seriously flawed. Current account dynamics will impact real exchange rate behavior. Additionally, if foreigners' (net) demand for the country's liabilities declines, the required current account compression will also overshoot. The current account reversals have had a negative impact on GDP per capita growth, even after controlling by investment. Moreover, the impacts of larger current account deficits on crisis depend on the definition of a crisis and on the regions of the world being covered. Thus, this chapter offers new and important evidence of the role that current account deficits play in currency crises, and the channels through which large current account reversals affect growth.

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