Dynamics of capital account and current account in India: Evidence from threshold cointegration with asymmetric error correction

Abstract

ABSTRACT This study investigates the nexus between India’s current and capital accounts using threshold cointegration and asymmetric error-correction approaches. The results validate the threshold cointegration between the current account (CA) and India’s capital account (KA). The asymmetric error correction-based results support the unidirectional Granger causality from KA to CA. Further, results reveal that KA’s cumulative sum of positive and negative deviation substantially impacts the CA. Finally, results of equilibrium adjustment path asymmetric effect from CA to KA suggest that KA reverts to equilibrium in the short run when CA decreases.