The determinants of the current account balance in inflation targeting countries

Abstract

Beginning with 1990s, “Inflation Targeting Discipline” emerged as a new monetary strategy. It is observed that there are some current account deficit increases in some economies of targeters. This observation led us to investigate the matter and therefore, to study on the relationship between the current account dynamics and the determinants of the current account deficit in those countries. The objective of this paper is to primarily find out the determinants of the current account balance by using yearly data related with the countries which apply inflation targeting regime within the period beginning from 1990 to 2006. The empirical work adopts the panel data analysis framework to capture the relationships among variables. In our model, as being the percentage of GDP, the current account balance (CAB) is the dependant variable and the real domestic GDP growth rate, the export/import coverage ratio, the degree of trade openness, the percentage change of the real exchange rate, the percentage of the government expenditure in the GDP and the real interest differentials are used as the explanatory variables.