Abstract
This paper empirically investigates the efiect 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 ratein afiecting the current account imbalances. This paper has four major flndings: First, in a simple accounting framework, net external debt holdings have a signiflcant dampening efiect on mediumterm current account imbalances: an increase in the net external debt holdings by 10% of GDP improves medium-term current account balances by 1% of GDP. Second, net external debt holdings afiect current account imbalances through their efiect on domestic investment and government expenditures. Private consumption, on the other hand, isn’t afiected by net external debt holdings. Third, across the country groups, it is found that OECD countries difier from developing countries in current account adjustments as government expenditures deteriorate more in developing countries than in OECD countries across the sample period. And flnally, net external debt holdings temper current account imbalances more during 1980s than 1990s.
Published Version
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