Capital mobility and current account adjustments

This paper empirically analyzes the capital mobility and current account balances. The role of net external debts on the small size current account balances and the global market discipline of the sovereign borrowers are analyzed to empirically establish a connection between capital mobility and current account adjustments.; The first study empirically investigates the effect of net external debt holdings on the size of medium-term current account balances. It utilizes an approach where net external debt holdings behave like a "shadow interest rate" in affecting the current account imbalances. This paper has four major findings: First, in a simple accounting framework, net external debt holdings have a significant dampening effect on medium-term current account imbalances: an increase in the net external debt holdings by ten percent of GDP improves medium-term current account balances by one percent of GDP. Second, net external debt holdings affect current account imbalances through their effect on domestic investment and government expenditures. Private consumption, on the other hand, isn't affected by net external debt holdings. Third, across the country groups, it is found that OECD countries differ from developing countries in current account adjustments as government expenditures deteriorate more in developing countries than in OECD countries across the sample period. And finally, net external debt holdings temper current account imbalances more during 1980s than 1990s.; The second study provides evidence that global markets discipline the sovereign borrowers of the developing countries through the country risk premium. The difficulties of testing the market discipline in the developing countries are remedied by the utilization of the IMF's disaggregated Government Finance Statistics data, and the World Bank's Global Development Finance data. By following the OECD methodology, the structural budget balances are estimated for each country. Then the effect on the structural budget balances of the country risk premium are estimated by instrumenting the real cost of borrowing by several variables such as openness, demographic variables and real GDP per capita growth. The fixed effect panel regressions show that increases in country default risk premium improve the primary structural balances.