© 1995 International Bank for Reconstruction and Development / The World Bank
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The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach
Atish R. Ghosh is in the Woodrow Wilson School of Public and International Affairs at Princeton University, and Jonathan D. Ostry is in the Research Department of the International Monetary Fund. Work on this article was completed while Atish R. Ghosh was a consultant with the World Bank. The authors thank Peter Montiel and Carmen Reinhart for helpful comments on a previous draft and Ava Ayrton-Lilaoonwala for assistance with the data.
According to the consumption-smoothing view, a high degree of capital mobility implies that agents are able to fully smooth their consumption in the face of shocks. This article develops a framework to test whether, indeed, the current account in developing countries acts as a buffer to smooth consumption in the face of shocks to national cash flow, which is defined as output less investment less government expenditure. Using vector autoregression analysis, we estimate the optimal consumption-smoothing current account with data from a sample of forty-five developing countries. We find that for a majority of the countries, the hypothesis of full consumption smoothing cannot be rejected, suggesting that capital mobility may after all be quite high in this group of countries.
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