Current Account Deterioration Research Articles

The Impact of Macroeconomic Factors on Current Account Deficit in ASEAN Countries

In most ASEAN nations, a deficit in the current account balance began in 2018, sparking concerns among these countries. The deficit in the current account has led to various disadvantages in ASEAN countries, harming the nation’s economic health. Therefore, this paper analyzes the macroeconomic factors influencing the current account deficit in selected ASEAN countries. Data from eight ASEAN countries were analyzed using a panel static approach. Findings reveal that exchange rate (ER), Term of trade (TOT) and interest rate (IR) are the main factors that influence the deterioration of current account balances. Meanwhile, money supply (MS), and oil price (OILP) showed insignificant relationships towards current account balances. As ER, IR and TOT influence the current account significantly, it is suggested that the authorities in ASEAN countries have policy reforms and macroeconomic adjustments accordingly to improve the current account deterioration.

Hypothesis of Twin Deficits in Cote d’Ivoire: The Nonlinear Effect Analysis with a Smooth Transition Autoregression Model (STAR)

This paper tests the hypothesis of double deficit in Côte d'Ivoire in non-linear aid framework, using an autoregressive smooth transition model (STAR). The main results validate the hypothesis of double deficit in Côte d' Ivoire. The effect of current balance on budget balance is greater than budget balance on current balance. Moreover, the rapid effects of current account instability on fiscal balance reveal the lack of expectation by economic agents that leads to current account deterioration compared to the deterioration of budget balance. Thus, economic policies aimed at influencing the effect on current balance would be more effective than those aimed at the effect on budget balance. In other words, Ivorian economy adopts a Keynesian performance in the event of current account shocks and performance that tend to be more or less Ricardian in presence of fiscal policy shock.

International credit supply shocks

House prices and exchange rates can potentially amplify the expansionary effect of capital inflows. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock, and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.

International Credit Supply Shocks

House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.

Fiscal deficits and current account deficits

Recent fiscal stimulus packages depend for their effectiveness on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, higher fiscal deficits can have problematic implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50% of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75% for a large economy such as the United States, and almost 100% for a small open economy.

Twin deficits in Morocco: An empirical investigation

This paper investigates the hypothesis of twin deficits in Morocco. According to this theoretical concept, the budget deficit is the main cause of the current account deficit. The Empirical results obtained from the impulse responses analysis of the VAR model and the Granger-causality test indicate the existence of an unidirectional causality going from the current account deficit to the fiscal deficit. This implies the existence of reverse causality i.e. the current account deterioration is the main cause of the fiscal deficit in Morocco

The Harber-Laursen-Metzler effect in Poland

The aim of the paper is to analyse of the Harberger-Laursen-Metzler effect in light of the theory and in practice, with particular reference to this effect in Poland in the period 1995-2009. The results of research carried out by means of the vector autoregression model (VAR) revealed that temporary improvement in terms of trade in Poland led to the current account improvement, and permanent improvement in terms of trade contributed to the current account deterioration. Thus it was confirmed prevalence of the Harberger-Laursen-Metzler effect in Poland. Additionally, results of investigation confirmed relatively greater impact of temporary changes in terms of trade on the current account than in the case of permanent changes in terms of trade. Analogous interdependence was revealed witch reference to explanation of the current account variability. Temporary changes in terms of trade accounted for in much more degree the current account variability in relation to permanent changes in terms of trade.

Fiscal Deficits and Current Account Deficits

The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and almost 100 percent for a small open economy.

Assessing Russia's Non-fuel Trade Elasticities: Does the Russian Economy React ‘Normally’ to Exchange Rate Movements?

This article attempts to assess the impact of exchange rate movements on Russian import and non-fuel export performance, using an error correction model. The estimation of trade equations shows that long-run price elasticities for imports and non-fuel exports are close to 0.6 and 0.7 respectively, hence relatively similar to those obtained for OECD countries. The Marshall–Lerner condition clearly holds. More precisely, we find that a 10% real appreciation (depreciation) of the currency leads on average to a non-fuel current account deterioration (improvement) of around 1% of GDP. Moreover, the short-term dynamics of the error correction model indicate that the response of the trade balance to exchange rate shocks is rapid, the adjustment being almost complete after one quarter. Finally, the evolution of import prices and non-fuel export prices of Russia, relative to its competitors on domestic and third markets, suggests that by 2004 the Russian economy had already lost the price competitiveness advantage it had gained after the 1998 crisis.

Intertemporal price speculation and the optimal current-account deficit: a comment

This note shows that contrary to the result of an unambiguous current account deterioration due to a transitory terms of trade deterioration obtained by Obstfeld (1983), his model, in general, implies an ambiguous current account response. The note demonstrates that three conditions which are individually sufficient for a current deficit to emerge in response to this transitory price shock are (i) an intertemporal elasticity of substitution exceeding unity, (ii) a non-positive initial asset position, and (iii) no domestic consumption of the exportable. The analysis reveals that Obstfeld's result remains valid if the focus is on the trade account but needs to be qualified if applied to the current account.

Temporary oil production, current account deterioration and the role of monetary and fiscal policy

This paper extends the results presented by Harvie (1990) and Harvie and Maleka (1991), using a similar theoretical and simulation framework to analyse the macroeconomic adjustment processes arising for an economy experiencing a temporary period of oil production. Similar assumptions to those in the aforementioned papers, regarding actual oil production, permanent oil revenues and the net export/import of oil, as well as to developments in the price of that oil under alternative wage adjustment assumptions are made. Here, however, emphasis is placed on developments in the current account, as reflected in foreign asset stock movements, after oil production ceases, as well as on the role that monetary, fiscal or fiscal/monetary policy can play in influencing current-account developments during this same period. Both Harvie (1990) and Harvie and Maleka (1991) conclude that, after a period of temporary oil production, the current account is likely to deteriorate. It is the contention here that the authorities will be concerned with such a potential development, and in the role which fiscal and/or monetary policy can play in alleviating such an effect. The results presented suggest that, to improve the performance of the current account, irrespective of the wage adjustment mechanism operative, after oil production ceases, the major thrust of macroeconomic policy should operate through fiscal rather than monetary policy. However developments in non-oil output would be influenced by the wage adjustment mechanism. With wage indexation, a tight fiscal policy after oil production ceases leads to a higher level of non-oil output than in the no policy response case, or one where monetary policy alone is used. With no wage indexation, the use of monetary and/or fiscal policy leads to lower levels of non-oil output. Hence the extent of wage indexation is important for this latter variable. The use of fiscal policy also has the added benefit of contributing to a lower consumer price level, again irrespective of the operative wage adjustment mechanism. If the emphasis of policy operates through monetary policy this paper suggests that, irrespective of the wage adjustment mechanism, the current-account problem will be exacerbated since foreign assets stocks will be lower. In addition, non-oil output and consumer prices will be lower. Hence potentially important policy prescriptions regarding the operation of fiscal and/or monetary policy for an economy after a temporary period of oil production, can be derived from this paper.

Economic Stabilisation in Argentina: the Austral Plan

The relative prosperity which Argentina enjoyed at the beginning of the century made it a candidate to be a major economic power. Despite its abundant natural resources and skilled manpower, Argentina has consistently failed to live up to its potential. Periods of growth have either been too sporadic or political upheavals too frequent for coherent economic policies to be effective. In recent decades the Argentine economy has been characterised by a deterioration in current account,1 exchange rate,2 gross domestic product (GDP) growth,3 investment,4 and has seen inflation become an endemic phenomenon.5 These factors have exacerbated the economy's inability to tackle its mounting foreign debt.

Tariffs, Employment and the Current Account: Real Wage Resistance and the Macro-Economics of Protectionism

Using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework with contract- based wage rigidity, we show that permanent tariffs may lead to a current account deterioration and a fall in employment, contradicting most of the literature of macro-economic effects of import tariffs. I show that this will always be the case if the economy is small enough. The crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.