Current Account Balance Research Articles

Sustainability of the Current Account in Developing Countries: A Fourier Wavelet-Based Unit Root Test

The sustainability of the current account balance for five fragile economies—Brazil, Argentina, South Africa, India, and Türkiye (namely, BASIT)—is investigated. These countries’ economies operate under a time current account deficit almost all the time, a condition that causes fragility to external shocks; the following fallout from these shocks may risk not only the domestic economy but also the international economy, such as by clogging trade and income distribution. In this study, the sustainability of the current account in BASIT countries is examined via wavelet-based Kapetanios, Shin and Snell (WKSS) and Fourier wavelet-based KSS (FWKSS) unit root tests, in conjunction with linear unit root tests. Even though traditional unit root tests generally support the sustainability of a current account deficit for all countries, a non-linear unit roots test confirms the traditional tests for only India and South Africa. Results from the wavelet transform of non-linear unit root tests indicate the unsustainability of the current account balance, except in the case Türkiye. Moreover, the FWKSS test confirms WKSS.

The performance of emerging markets during the Fed’s easing and tightening cycles: A cross-country resilience analysis

We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004–2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience.

Examining Sigma and Beta Convergence in Emerging Market Economies

This study examines convergence among the select emerging market economies (EMEs) over two decades, from 2000 to 2020. The coefficient of variation was used to measure sigma convergence. Cross-sectional and panel regression analyses were performed to examine unconditional and conditional beta convergence, respectively. The macroeconomic variables chosen for the panel regression analysis were gross fixed capital formation, current account balance, inflation, research and development expenditure, world governance index and life expectancy index. The results supported the presence of convergence (both sigma and beta) among the EMEs over the selected period. In addition, it was found that, except for the current account balance, all selected variables contributed significantly to the growth process of EMEs.

Factors influencing IMF assistance in the Sub-Saharan African region.

This study examines the determinants influencing the likelihood of Sub-Saharan African (SSA) countries seeking assistance from the International Monetary Fund (IMF). The IMF, as a global institution, aims to promote sustainable growth and prosperity among its member countries by supporting economic strategies that foster financial stability and collaboration in monetary affairs. Utilising panel-probit regression, this study analyses data from thirty-nine SSA countries spanning from 2000 to 2022, focusing on twelve factors: Current Account Balance (CAB), inflation, corruption, General Government Net Lending and Borrowing (GGNLB), General Government Gross Debt (GGGD), Gross Domestic Product Growth (GDPG), United Nations Security Council (UNSC) involvement, regime types (Closed Autocracy, Electoral Democracy, Electoral Autocracy, Liberal Democracy) and China Loan. The results indicate that corruption and GDP growth rate have the most significant influence on the likelihood of SSA countries seeking IMF assistance. Conversely, factors such as CAB, UNSC involvement, LD and inflation show inconsequential effects. Notable, countries like Sudan, Burundi, and Guinea consistently rank high in seeking IMF assistance over various time frames within the observed period. Sudan emerges with a probability of more than 44% in seeking IMF assistance, holding the highest ranking. Study emphasises the importance of understanding SSA region rankings and the variability of variables for policymakers, investors, and international organisations to effectively address economic challenges and provide financial assistance.

India’s Balance of Payment Position: An Overview

As far as Indian BOP is concerned, over the years generally balance of trade indicated deficit while balance of services remained in services. Main reason being imports of India for the visible items such as crude oil and gold far exceed the exports by India but on services account India being known for skilled force rendering services abroad and being IT hub, net services stood in surplus and similarly private transfer payments in the form remittances usually indicate surplus. However, surplus in BOP does not always guarantee the prosperity and likewise deficit does not always signals danger towards the solvency of a nation. Surplus on current account and favourable balance of payment may be on account of massive foreign debt and unprecedented private capital inflows. Thus, favourable BOP may eventually become fatal if the reasons for surplus not carefully considered by authorities and rather become careless in managing BOP. Similarly, BOP deficit cannot be taken as threat to the domestic economy if it is due to huge amount of financial aid to other countries and capital outflows but otherwise continuous BOP deficit may eventually lead to a critical situation such as BOP crisis. Thus, BOP analysis should be performed carefully and results of analysis should be critically evaluated to take appropriate measures to save the domestic economy at the global level.

The deterioration of current account balance in selected countries of MENA: Causes of concern

The deterioration of current account balance in selected countries of MENA: Causes of concern

The impact of public debt on the economic growth. evidence for Kosovo

This study aims to analyze how public debt influences economic growth in Kosovo, using quarterly data from Q1 2008 to Q4 2022 and employing the generalized method of moments (GMM). The research reveals that there is a negative relationship between public debt and economic growth when other factors such as trade openness, total investment, current account balance, and primary balance are considered. Furthermore, the findings confirm an inverted “U-shaped” relationship between public debt and economic growth, indicating that the optimal debt level is between 27.75% and 36.2% of GDP.

Makroekonomske, institucionalne i financijske odrednice deficita tekućeg računa u Sjevernoj Makedoniji

The role of current account balances in macroeconomic policy is progressivelyhigh, especially in transition countries. Using yearly level data for a 1994-2022period, based on co-integration analysis, this research empirically investigates themacroeconomic, institutional, and financial determinants of the current accountdeficit in North Macedonia. The results of the study reveal that a country’s currentaccount deficit is significantly affected by domestic demand factors like realeffective exchange rate, output gap, and trade openness, the fiscal-related factor ofgross debt position, the institutional-related factor of economic freedom, legal andproperty rights, regulatory index, control of corruption, government effectiveness,as well as financial development captured by money supply. The study also findsout that the country has recorded more deficit in the current account thanpotentially expected during two time periods, the pre-financial crisis period 2001-2008 and during the COVID-19 crisis period 2019-2022.

Macroeconomic factors influencing the Saudi balance of payments’ current account dynamics from 1995 to 2019

Reliable development reports highlight persistent deficits in developing countries’ balance of payments since the 1980s and 1990s, attributed to monetary turmoil and ambitious development plans. Saudi Arabia faces similar challenges as the leading economy in the Middle East and North Africa region.The objective of this study is to pinpoint the macroeconomic determinants influencing Saudi Arabia’s current account balance from 1995 to 2019. This aligns with the objectives of Saudi Vision 2030, which emphasizes economic diversification and sustainability.Eleven macroeconomic determinants were subjected to the Principal Component Analysis model and the Autoregressive Distributed Lag model for analysis. Five determinants, such as budget balance, goods exports, per capita gross domestic product, gross domestic product growth, and domestic liquidity growth, were identified as significant contributors to the current account balance. The Autoregressive Distributed Lag model revealed that goods exports, domestic liquidity growth, gross domestic product growth, and per capita gross domestic product exert a statistically significant positive impact on the current account balance in the long term.The research findings highlight the significance of goods exports, economic growth, and domestic liquidity in shaping Saudi Arabia’s current account balance, emphasizing the need for diversification away from oil dependence to mitigate economic vulnerabilities. The study underscores the implications for Saudi Vision 2030, stressing strategic policy interventions to foster non-oil exports and stimulate economic growth. Additionally, the analysis identifies temporal variations in export dynamics, emphasizing the importance of policy continuity and adaptability for economic resilience. AcknowledgmentsThe authors gratefully acknowledge financial support from The Deanship of Scientific Research, King Faisal University (KFU) in Saudi Arabia. The present work was done under Project Number (CHAIR 138).

The Prospect of the GCC Monetary Union and its Expansion to Other MENA Countries

This study investigated the possibility of expanding the GCC monetary union to other MENA countries using cluster analysis for the period 2000-2018. It also examined whether the economic characteristics of the countries provide evidence for the readiness of countries for the proposed union. The findings show that there was heterogeneity in the GCC and MENA countries suggesting that the countries were not yet economically ready for the launch of the monetary union. We found evidence in support of the expansion of the GCC monetary union to other MENA countries with two categories of countries, the core and the periphery. We also revealed key variables, including inflation differential, debt service requirement, and current account balance, which clearly demarcated the GCC and other MENA countries. These findings underscore the need for policy-makers in MENA countries to strengthen intraregional trade creating policy, policy coordination, and harmonisation for a successful and sustainable monetary union.

Causality Analysis Between Exchange Rate, Current Balance Sheet, Inflation, and Gross Domestic Product in ASEAN-5 1980-2022

This research investigates the causality between exchange rate, current balance sheet, inflation, and gross domestic product in ASEAN 5 from 1980 to 2022. The method employs the Granger causality test. This research finds weak evidence of a J-curve effect on the current account balance in Indonesia because empirical results with several tests and models reject the J-curve hypothesis and do not find evidence of an influence of the rupiah exchange rate on Indonesia's current account balance in the long term so that it can the conclusion is drawn that: (1) There is no causal relationship between the current account balance and the exchange rate in Indonesia from 1996-2022; (2) Changes in exchange rates affect changes in the current account balance in the short and long term; (3) The mechanism for changes in the current account deficit does not affect changes in the exchange rate

A Multivariate Analysis of the Interplay between Energy Resources, Economic Growth, and Financial Stability. Evidence from Azerbaijan

Abstract The aim of this research is to conduct an objective and predictive evaluation of Azerbaijan's economic growth from 1997 to 2022. Since Azerbaijan is a significant exporter and producer of energy resources, its economic growth is substantially influenced by the remarkable advancements in oil and gas extraction and production since the early 2000s. Methodologically, we have designed several models to ascertain the influence and impact of the following explanatory factors-oil reserves, natural gas reserves, net trade, current account balance, inflation rate, unemployment rate, interest rate and carbon dioxide emissions - on the economic growth rate. The study utilised a combination of uni- and multi-factorial linear regression techniques, with accuracy and robustness testing conducted on all eight models. Research hypotheses were tested and a predictive analysis was implemented and evaluated over the studied period. Our findings demonstrate that the growth of Azerbaijan's economy is positively impacted by the dynamics and development of energy product trade, particularly in oil. As a result, GDP increased by an average of 2.50%. It is also confirmed that inflation and unemployment have a negative impact which unavoidably leads to instability and an economic downturn. In contrast, the robustness indicators (namely, RMSE, MAE and MAPE) could assess the predictive analysis of economic growth. The validated, low values further endorse the credibility of the eight models in accurately forecasting the economic growth rate throughout the studied period. The study disproves the existence of a positive correlation between GDP and the quantity of carbon dioxide emissions. However, it has been demonstrated that Azerbaijan is taking significant measures to achieve its environmental objectives. These measures include the implementation of taxation, a reduction in CO2 emissions by up to 55% by 2030, and a shift towards renewable energy sources. Our research aims to enhance the utilisation of renewable energy resources, increase the efficiency of the domestic energy infrastructure and implement measures to moderate high levels of unemployment and inflation, thus ensuring sustained economic growth in Azerbaijan.

Climate Change in the EU’s Macroeconomic Imbalance Procedure

Abstract EU member states observe an elaborate process to preserve macroeconomic stability: the macroeconomic imbalance procedure (MIP). The MIP is supposed to monitor and prevent macroeconomic imbalances – and if necessary, correct them. It considers a variety of variables to determine the existence of imbalances, e.g. the current account balance or unit labour costs. However, the macroeconomic impact of climate change is ignored. In light of the growing economic risks due to climate change, this article argues that the MIP should consider climate-related risks explicitly to maintain relevance.

ASSESSMENT OF PUBLIC DEBT DRIVERS IN THE BALKANS

This study investigates the main drivers of public debt and assesses the overall debt structure in the Balkan countries. Regardless of a close to 50% average debt level, there is no immediate threat of escalation compared to developed countries. The empirical analysis leverages three advanced econometric techniques to control for cross-country specifics and potential biases due to data disruptions. Sourced from the World Bank and the International Monetary Fund, the data are of quantitative type collected from 2000- 2021. Empirical evidence suggests that Real GDP Growth and Current Account balance are crucial determinants of economic performance, with political regimes also exerting a notable influence. As the time frame of the research consists of the COVID-19 pandemic, it is essential to consider structural breakdowns to avoid any coefficient biases. Unsurprisingly, the dummy variable COVID-19 depicts a significant effect as public debt increased by 2.51 percentage points once the pandemic occurred. The rest of the variables, including interest rates, government expenditure, and unemployment rate, are statistically insignificant. Empirical evidence from the present study supports the hypothesis that pursuing genuine economic development through the advocacy of domestic production and trade, coupled with the consolidation of democratic institutions, can act as a check on the spiraling growth of public debt.

Exchange rate, external reserves and current account balance nexus in oil-dependent countries: A Toda-Yamomoto-based Panel Vector Autoregressive (PVAR) approach

The international monetary authorities have been consistently advising oil-dependent countries to change their exchange rate policy from a fixed to a floating exchange rate regime. While some of these countries including Nigeria have announced their adoption of a free-floating exchange rate system, evidence shows that the majority are suffering from “fear of floating”, hence operating an abridged exchange rate system. This study employs the Toda-Yamomoto-based Panel Vector Autoregressive (PVAR) model to use the causality approach to determine the exchange rate system that best explains the de facto exchange rate policy system operating in these countries. This is explained by the dynamic causality between exchange rates and foreign reserves. The dynamic causality between the exchange rate and current account balance also explains the potential effect of devaluation to improve the external trade balance, which implies the J-curve and Marshall Lerner condition. The results show that there is no significant causality from foreign reserves and trade balance to the exchange rate, suggesting that oil-dependent countries are more aligned to a fixed exchange rate regime than a floating exchange rate regime. We also find significant negative causality from the exchange rate to foreign reserves, while foreign reserves have a positive causal effect on the current account balance. This implies that the expected devaluation gains that may be prompting oil-dependent countries to stick to fixed exchange rate regimes are not there, as currency devaluation tends to worsen trade performance and foreign reserves rather than improve them. While oil-dependent countries are not benefiting much from a fixed exchange rate system, it is recommended that appropriate policy to boost private sector generation of foreign exchange should be put in place before the adoption of a full-fledged floating exchange rate system.

Spatial Analysis of the Effect of Halal Product Export and Import on Current Accounts in OIC Countries

OIC countries are countries that have the highest development of the halal industry. Most of the export and import activities carried out by OKI are halal products. Exports and imports of the country’s halal products will describe the condition of the current account surplus or deficit. This study aims to determine the spatial dependence on the current account and the effect of exports and imports of halal products on the current account. The method used descriptive quantitative techniques with spatial analysis. This research was conducted in 51 OIC countries in 2021 using secondary data. The independent variable values are obtained from ITC and the dependent variable is obtained from WDI. The results showed that there is a spatial autocorrelation in the current account, and the spatial autoregressive regression (SAR) results show that exports of halal products have a significant positive effect on the current account. Meanwhile, imports of halal products have a negative but not significant effect on the current account. Keywords: spatial, halal export, halal import, current account balance

The Impact of Monetary Policy and Macroeconomic Indicators on the Current Account in Developing ASEAN

The current account balance is a component of the balance of payments, in which a surplus or deficit is a form of a country’s external balance or imbalance. Since the 2008 financial crisis and the COVID-19 pandemic, several countries, especially developing countries, have experienced external imbalances, which is related to a continuous pattern of transactions with the rest of the world. Developing countries in the ASEAN region are often vulnerable to experiencing external imbalances which are reflected in their current account balance, which every year the country continues to fluctuate and tends to decrease until it experiences a current account deficit. This research was conducted to analyze the impact of monetary policy and macroeconomic indicators on the current account situation of developing countries in the ASEAN region during the 15 year period of 2007–2021. The Current Account Balance as the dependent variable and the independent variable uses Interest Rates in explaining monetary policy and macroeconomic variables including Exchange Rate, Inflation, Gross Domestic Product, Foreign Direct Investment, and Trade Openness. This study analyzes long-term and short-term effects using the VECM panel model. The results show that Interest Rates in the short term has no effect, but in the longer term has a significant negative effect. The Exchange Rate in the short term and long term have a significant positive effect. Inflation and GDP have no effect in the short term but have a significant negative effect in the long term. FDI has a significant positive effect in the short term and the long term. And finally, Trade Openness in the short term has a significant positive and in the long term has a significant negative effect. Keywords: current account balance, interest rate, macroeconomic, VECM panel

On the time-varying impact of China's bilateral political relations on its trading partners: “Doux commerce” or “trade follows the flag”?

We assess the impact of China's bilateral political relations with three main trading partners—the US, Germany, and the UK—on current account balances and exchange rates, over the 1960Q1–2022Q4 period. Relying on the lag-augmented VAR approach with time-varying Granger causality tests, we find that political relationships with China strongly matter in explaining the dynamics of current accounts and exchange rates, supporting the “trade follows the flag” view. Such relationships cause the evolution of the exchange rate (except in the UK) and the current account; these causal links being time-varying for the US and the UK and robust over the entire period for Germany. These findings suggest that policymakers should account for bilateral political relationships to understand the global macroeconomic consequences of political tensions.

Economic resilience: Why some countries recover more robustly than others from shocks

Economic resilience – the tendency of economies to bounce back from negative shocks – has never been more important, given the growing prevalence and frequency of such shocks. The existing literature on its determinants are inconclusive. We therefore reanalyze those determinants for a large sample of countries, first collectively and then separately for advanced countries and emerging markets. Deeper recessions are followed by stronger recoveries, consistent with Friedman's plucking model of the business cycle. In contrast, longer recessions are associated with weaker recoveries, as if more extensive destruction of human capital and other hysteresis effects limit resilience. Trade openness and exchange rate flexibility, which facilitate the substitution of external demand when domestic demand is weak, are positively associated with resilience, as are a strong current account balance and ample foreign reserves. Financial openness and rapid private credit growth in the preceding expansion contribute negatively, reflecting their legacy of financial problems.

Electricity Consumption, Renewable Energy Production, and Current Account of Organisation for Economic Co-Operation and Development Countries: Implications for Sustainability

This paper uses the bootstrapped Granger Causality Testing approach to investigate the relationship between electricity consumption, renewable energy production, and the current account of the six OECD countries. One of the main advantages of using this approach is that it captures the cross-section dependence in our sample and applies the Seemingly Unrelated Regression (SUR) to examine the causality relationship between the variables. The empirical findings show the presence of cross-section dependence in our sample as the six Organisation for Economic Co-operation and Development (OECD) countries share resources, capabilities, and key competencies. Notably, a unidirectional causality exists running from electric power consumption to the current account of the USA. The current account balance causes electric power consumption in the case of France and Switzerland. The tri-variate causality relationship between electricity consumption, renewable energy production, and current account balance could not be established in the case of Germany, Finland, or the UK.