Liquidity Risk Aversion, Debt Maturity, and Current Account Surpluses: A Theory and Evidence from East Asia / Shin-ichi Fukuda, Yoshifumi Kon.

Format:

Book

Author/Creator:

Fukuda, Shin-ichi.

Contributor:

National Bureau of Economic Research.

Kon, Yoshifumi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13004.

NBER working paper series no. w13004

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Liquidity Risk Aversion, Debt Maturity, and Current Account Surpluses

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

The purpose of this paper is to show that macroeconomic impacts might be very different depending on what strategy developing countries will take. In the first part, we investigate what macroeconomic impacts an increased aversion to liquidity risk can have in a simple open economy model. When the government keeps foreign reserves constant, an increased aversion to liquidity risk reduces liquid debt and increases illiquid debt. However, its macroeconomic impacts are not large, causing only small current account surpluses. In contrast, when the government responds to the shock, the changed aversion increases foreign reserves and may lead to a rise of liquidity debt. In particular, under some reasonable parameter set, it causes large macroeconomic impacts, including significant current account surpluses. In the second part, we provide several empirical supports to the implications. In particular, we explore how foreign debt maturity structures changed in East Asia. We find that many East Asian economies reduced short-term borrowings temporarily after the crisis but increased short-term borrowings in the early 2000s. We discuss that our results have important implications for the recent deterioration in the U.S. current account.

Notes:

Print version record

April 2007.