Persistent Current Account Deficits and Balance of Payments Crises

Persistent current account deficits are common among low- and middle-income countries. We evaluate when this situation triggers a crisis and characterize it. Using a non-parametric estimator, we find a critical value for the yearly current account deficit just before the crisis sets off. These findings give rise to a different type of crises: countries that have increased their external indebtedness by an accumulated amount of at least 26%-31% of the GDP in a time span of 3 to 5 years, when they are hit by a crisis, they suffer a more severe recession than an average sudden stop. We call these events persistent balance of payment crises. This generates a consumption fall of 3.1% and a current account reversal 4.9 percentage points. We also contribute to the structural characterization of balance of payment crises. Using a canonical model augmented with an endogenous interest rate, given enough persistence of the GDP, we can replicate these stylized facts. In this sense, the variability of national income in countries which are external net debtors is critical