Aftermaths of current account crisis: export growth or import contraction?

Abstract

This paper defines current account crises as current account adjustments that occur in the aftermath of a sizable reduction in capital flows. We study the characteristics of such current account adjustments, particularly whether they are executed through export growth or import contraction. We find significant differences between Asia and Latin America, with Asian countries adjusting through export growth and Latin America through import contraction. When looking at the fundamentals that explain such dissimilar behavior, we conclude that these differences are attributable to differences in the degree of openness and financial dollarization with the size of the financial sector being irrelevant. We argue that the analysis allows the conclusion that “pesified” financial sectors that insulate the domestic financial sector from exchange rate movements are better suited to deal with unstable international financial markets.