Is the Current Account Imbalance of Korea Sustainable?

Abstract

Purpose - This research examines the sustainability of the current account imbalance for Korea. On the theoretical basis of the intertemporal optimization approach to the current account, we tested for a long-run dynamic budget constraint of export and import plus net interest payment. Design/Methodology/Approach - Nonlinear asymmetric autoregressive-distributional lag methodology proposed by Shin, Yu and Matthew (2014) was applied as an econometric analytical tool. The Korean balance of payments data was adopted in the periods of 2001Q1~2021Q1. Findings - Our empirical results found that the Korean current account imbalance is sustainable when imports plus net interest payments increase, but unsustainable in the case of imports plus net interest payments decrease. That means the long-run dynamic budget constraint holds in asymmetric form. Research Implications - Asymmetric aspects of intertemporal dynamic budget constraints, e.g, asymmetric sustainability of current accounts is the important differentiation of this research. The current account surplus imbalance of Korea is hard to sustain when it comes to decreasing absorption led by decreasing domestic investment. A current account surplus imbalance could be sustainable at a desirable level, and absorption should be increased with more domestic investment.