Probability of Current Account Reversals in Argentina and other Latin

Córdoba

Congreso; XLIII Reunión Anual de la Asociación Argentina de Economía Política; 2008

Asociación Argentina de Economía Política

In the framework of the solvency approach a Random Effects Probit Panel Model is run, estimating for 1979-2004 the impact of selected shocks on the probability of CARs in Latin American economies, as a measure of external vulnerability. Short-run debt, GDP growth, terms of trade shifts, and contagion, appear statistically significant. Simulations point out that shocks easily absorbed when isolated, drive the probability of reversals rapidly up above 40% when they occur simultaneously. Policy implications are that economic properties of safe scenarios may be quantitatively established, but also external solvency may vanish rapidly out of control of domestic authorities.