The dynamic relationship between macroeconomic factors and current account balance: Panel evidence from 28 African countries

Abstract

This study empirically tests the validity of the current account theory using a panel ARDL estimation technique for 28 African countries from 1980 to 2019. Also, the study examined the effect of private consumption, income, government spending, investment, and inflation on the current account balance. Applying data to Obstfeld and Rogoff‘s inter-temporal current account model, the results show that the current account theory holds for the selected SSA countries in the short run but not in the long run. In addition, the study finds that an increase in private consumption, government expenditure, and investment leads to the deterioration of the current account balance in both the long and short run. In contrast, higher GDP per capita and inflation improved the current account balance in both the long and short run. The novelty of the article is that it is the first study to empirically test the validity of Obstfeld and Rogoff's inter-temporal current account model. This study also contributes to the literature focusing on developing countries, specifically, African countries. The study recommends that policymakers adopt policies to promote private savings, economic growth, fiscal discipline and macroeconomic stability to stimulate the current account balance in the region.