Abstract
Large current account imbalances are perceived to be a macroeconomic risk. Consequently a reversal (especially of a deficit) is often regarded as good in itself, and is frequently pursued as a policy objective or as part of reform programme. This perception is surprising in light of the intertemporal approach to the balance of payments, where international borrowing and lending - and therefore current account imbalances - result from rational economic decisions with a time dimension. But the theory does not settle the matter. Hence, this paper investigates the actual experience of current account reversals in Africa, the region where current account imbalances have been the largest (relative to GDP) in recent decades. We identify periods of current account reversal (both deficits and surpluses) and identify the associated development in real GDP growth, the real effective exchange rate, inflation, investment and aid inflows, both prior to and following the reversal. These results are compared with a control group. The results do not suggest that these reversals have been associated with either disruptive business cycle episodes or other macroeconomic risks in the sample group.
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