Large current account deficits and neglected vulnerabilities

Daniel Aromí

2019-03-28 - Using a sample covering 46 advanced and emerging economies over 1990-2017, it is found that large current account deficits are reversed significantly faster than what forecasters anticipate. In addition, large current account deficits are followed by negative surprises in economic growth, low asset returns and drops in sentiment. The documented regularities are robust to changes in the specification and do not seem to be explained by efficient learning dynamics. These findings are indicative of systematic neglect of vulnerabilities and have implications for the understanding of past economic events and the design of macro-prudential policies.