External Debts and Current Account Adjustments

External debt and current account adjustments: The role of trade openness

“…In all cases, the external debt share is not significant in the lagged form. Bulut (2011) argues that the final effect of high debt on current account balance takes time, such as one period before, to be realized. This informs why we have included the lagged value of external debt in our regression.…”

“…Our approach, which follows Bulut (2011), suggests that running high current account deficits increases the effective interest rate for countries, thus, SSA countries with high external debt face a positive spread over world real interest rate making it cost-ineffective for heavily indebted SSA countries reputed for low credit rating to run consistent current account deficits due to high costs associated with the accumulated debt to finance the deficits. We argue that the high costs lead to a decline in external debt accumulation which either slowdowns investment or increases correlation between investment and saving, resulting in a decline in current account deficits and causing current account deficits to gradually adjust upwards from the negative terrain towards the origin.…”

“…To do this, we interact openness with external debt and study the impact of the resulting variable on current account adjustments. In specifying our empirical model, we draw on current account determinants implied in our theoretical model and we also follow Calderon et al (1999Calderon et al ( , 2002, Bulut (2011) and to some extent, Chinn and Prasad (2003). This ensures our regressions include a comprehensive, but not exhaustive list of control variables identified in the literature as current account determinants.…”

Bilateral Macroeconomic Connectivity and Crisis Patterns

“…Such cases are associated with a high probability of imbalances arising in trade with other countries. In addition to this, real economic indexes such as the exchange rate, the jei Vol.30 No.4, December 2015, 761~798 Jong-Hee Kim http://dx.doi.org/10.11130/jei.2015 766 interest rate, and the rate of inflation have also been fingered as major causes for the occurrence of trade imbalances (Estrella and Mishikin 1998, Nickel and Vansteenkiste 2008, Bulut 2009, Craighed and Hineline 2011. This is to say that drastic fluctuation in such indices in comparison with a trading partner can lead to a trade imbalance.…”

External debt in heavily indebted poor countries

“…External borrowing is increasing radically day by day and across the world, which implies there is no guarantee about the nonexistence of foreign debt crises in the future. Developing countries, including HIPCs, borrow from abroad to finance their domestic investment (Bulut 2011), maintain economic growth, and refinance their existing debt. However, once the debt grows more prominent, unmanageable, and unsustainable, it becomes a major macroeconomic destabilizing factor and a severe bottleneck to the promotion of both domestic and foreign investment.…”