Current Account Dynamics Research Articles

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).

An empirical analysis of consumption and current account in an intertemporal stochastic model

This study employs a non-linear state space model and applies Extended Kalman Filter to analyze the effects of shocks to output, investment and government consumption for the US economy within a stochastic intertemporal current account framework for the particular period 1989Q2-2019Q4. It is shown that consumption and current account dynamics are successfully explained and the real interest rate, which is needed to rationalize the consumption and income relationship, is found to be fairly reasonable. The parameter estimates of the macroeconomic variables in the model indicate high accuracy of forecast according to the MAPE criteria for model evaluation. The intertemporal substitution and compensation effects allow aggregate consumption function to absorb exogenous shocks and reflect the smooth transition of the economy to the reestablishment of equilibrium position.

Dominant Drivers of Current Account Dynamics

Dominant Drivers of Current Account Dynamics

Economic growth, current account dynamics, and growth regimes in the Baltic states

ABSTRACT This article considers the growth performance of the Baltic states from the mid-1990s to 2021. Economic growth was rapid before the global financial crisis but slowed markedly after the crisis. Panel data estimations using seemingly unrelated regressions suggest that the dynamics of the current account balance are important for short and medium-term growth in the Baltic states but that there is a break signifying a change of short-term growth regime around the time of the global financial crisis. Before the crisis, rapid growth was supported by domestic demand that was made possible by large current account deficits. After the crisis, economic growth was supported by external demand reflected in improvements in current account balances. The shift in the short-term economic growth regime after the global financial crisis has brought lower rates of economic growth but also reduced financial vulnerability.

Current account dynamics: A SVAR analysis when the country‐specific shocks are correlated at leads

AbstractThe assumption of no correlation of the structural shocks as Blanchard and Quah's identification (BQ) assumes is not suitable when central banks, through discretionary policies or inflation targeting regimes, affect the output growth among other goals. In this study, we analyze the present value model of the current account (PVM) using a three‐SVAR specification and a modified BQ to identify three structural shocks: country‐specific permanent, country‐specific temporary, and global, but allowing the correlation of the domestic ones. Using Australia, Canada, Norway, and the UK, we find that those shocks are correlated and are less volatile than BQ would assume they are. The PVM predictions that hold are: (i) a positive (no) response in the current account to a country‐specific temporary (global) shock; and (ii) with the exception of Australia, there is no response in the current account to a country‐specific permanent shock. In addition, for all countries, the country‐specific temporary shock dominates current account changes but does not dominate net output growth fluctuations, which was a puzzle identified by a prior study. The role of the shock is enhanced by the modified BQ, but even with this enhancement, it still does not hold the most significant role in output variations, as indicated by PVM.

Fiscal Consolidation and, Current-Account Dynamics in South-Asian Countries

Fiscal Consolidation and, Current-Account Dynamics in South-Asian Countries

Asymmetric trade liberalizations and current account dynamics

AbstractI propose asymmetric trade liberalizations as a new potential determinant of current account dynamics. I focus on South Korea, which experienced a rise and fall of its current account in the period from 2010 to 2018, when it signed preferential trade agreements (PTAs) with its main trading partners. First, I develop a model where the current account depends on the timing of present and future relative changes of trade costs. Second, I provide empirical evidence supporting the key predictions of the model using the Canada–Korea PTA. PTAs provide predictable, potentially asymmetric, future tariff paths on many products. I use information for over 2,500 HS‐6 products to build relative trade liberalization measures, and show that current (future) high relative trade liberalizations tend to decrease (increase) the trade balance, consistent with the model. Finally, I propose a quantitative investigation of the Korean surplus based on the asymmetric dynamics of trade costs between South Korea and its main trading partners. I develop a two‐country international real business cycle model augmented with trade costs. When fed with the actual asymmetric trends found in the data, the model generates a current account surplus of about 2.15% of GDP, roughly 66% of what was observed in the Korean data.

Current Account Dynamics: On Income and Trade Balance

We investigate the dynamics of Japan's income and trade balance between 1996:Q1 and 2019:Q4 via a structural VAR model. The two most important constituents of the current account (trade balance and income balance) and seven other macroeconomic variables are entered in our VAR model. We implement a shadow rate for the measure of monetary policy under the unconventional monetary policy regime, including a zero lower bound interest rate. By using a standard SVAR model from the literature, we find that world shocks dominate and rule the dynamics of Japan's current account. Through additional short-run zero restrictions, we also find that exogenous exchange rate shocks affect the current account.

Dynamics of capital account and current account in India: Evidence from threshold cointegration with asymmetric error correction

ABSTRACT This study investigates the nexus between India’s current and capital accounts using threshold cointegration and asymmetric error-correction approaches. The results validate the threshold cointegration between the current account (CA) and India’s capital account (KA). The asymmetric error correction-based results support the unidirectional Granger causality from KA to CA. Further, results reveal that KA’s cumulative sum of positive and negative deviation substantially impacts the CA. Finally, results of equilibrium adjustment path asymmetric effect from CA to KA suggest that KA reverts to equilibrium in the short run when CA decreases.

News-driven international credit cycles

How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a banking sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital which turns out to be incorrect at a later date, the model captures the patterns of financial flows and current account dynamics in Spain between 2000–2010, including the changes in the sectoral allocation of bank credit and movements in cross-country borrowing during the boom and the bust. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector.

Labor and product market reforms and external Imbalances: Evidence from advanced economies

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

Bi-demographic and current account dynamics using SVAR model: evidence from Saudi Arabia

The study explores the impacts of the bi-demographic structure on the current account and gross domestic product (GDP) growth. Using structural vector autoregressive modeling (SVAR), we track the dynamic impacts on these underlying variables. New insights about the dynamic interrelation between bi-population age dependency rate, current account, and GDP growth have been developed. In the short and medium terms, the reactions of GDP growth to both shocks of native and immigrant working-age populations move unsteadily in opposite directions. However, in the long run, both effects become moderately positive. Additionally, the positive long-run contribution of immigrant workers to the current account growth largely compensates for the negative contribution of the native population. We find a negative hump-shaped reaction of Saudi Age Dependency Rate to immigration policy shocks during a generation. When the shocks emanate from immigrants’ working age, there is a complex mechanism from the complementarity process to the substitutability process between immigrants and the Saudi workforce. In the short and medium term, the immigrant workers are more complement than substitutes for native workers.

Current and Capital Account Dynamics in India: An Empirical Analysis of the Post-Reform Period

This article analyses the dynamics between current account (CA) and capital account in post-liberalisation India. Contemporaneous occurrence of CA deficit along with capital account surplus suggests the possible causal relationship between the two accounts. The theoretical debate around capital account liberalisation (KAL) is developed with the intention to lend support to empirical results for policy formulation. The analysis of arguments for and against KAL liberates us in interpreting the empirical results. Within the framework of KAL, this article proceeds to estimate the relationship between current and capital account. A set of econometric tests are performed on an Indian quarterly data over the period from 1996 to 2018. Econometric analysis reveals that capital account affects CA negatively. Short-run capital and debt flow also affect CA negatively, while foreign direct investment (FDI) affects it positively. We find debt flow to be an important factor, contributing to CA imbalance. Such dynamics is critical for any decision about KAL. From the analysis, it is observed that India needs to encourage FDI, while maintaining strict control over short-term capital, which is highly disruptive, and proceed cautiously towards full KAL. JEL Codes: C32, F21, F32

Dynamic interactions between financial cycles, business cycles and macroeconomic imbalances: A panel VAR analysis

We use Bayesian and GMM panel VAR frameworks to study interactions between financial and macroeconomic imbalances based on a global sample of 24 countries spanning the period 1998–2012. We find that financial cycles play an important role in shaping macroeconomic imbalances with expansions inducing economic overheating and a downward pressure on public debt-to-GDP ratios. Financial misalignments invoke deeper and faster response of business cycles in bank-based economies and milder, but more persistent in market-based economies, with greater significance for current account and public debt dynamics. High-public debt countries reveal much stronger effects on fiscal stance and output gap trajectories.

Labor and Product Market Reforms and External Imbalances

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

Why Has China's Current Account Balance Converged after the Global Financial Crisis?

AbstractChina's current account surplus declined significantly from its peak of nearly 10 percent of GDP in 2007 to less than 1 percent in 2018. The new pattern offered fresh evidence for our understanding of China's current account dynamics. In this paper, we used flow of funds data to gauge its underlying driving forces. Specifically, by employing index decomposition analysis, we decomposed the current account from the perspective of savings and investment into three sectors: the household, corporate, and government sectors. We found that the decline in China's current account ratio was first driven by cyclical factors, i.e. weak corporate saving growth induced by the economic slump in 2009 as well as the following massive corporate investment bolstered by the government stimulus plan. However, such cyclical factors quickly subsided, and the subsequent current account balance reduction was later supported by structural factors, i.e. household savings declined enduringly and the Chinese government switched to a more expansionary fiscal policy. There are three possible explanations for the structural movement: reduced precautionary saving due to higher social security coverage ratio, lower corporate profits as a result of economic slowdown, and a twin deficit due to the government's more relaxed fiscal stance. The new facts, however, were not consistent with other current account theories focusing on long‐term aspects of the saving–investment account puzzle, especially those relating to China's special demographic characteristics.

Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

Global demographic change and international capital flows: Theory and empirics

While population has been aging globally, regions and countries are significantly asymmetric in the timing and speed of the demographic transitions, especially between developed and developing regions. This paper explores the impacts of asymmetric demographic change on international capital flows with two contributions. First, the paper introduces demographic structure and pension systems into a theoretical overlapping-generation model of a small open economy, and derives an analytical solution which links a large set of factors to the current account. This framework enables tractable analysis of the effects of various demographic shocks on external balances, and also of the interaction between demographic shocks and productivity growth and pension systems. Second, the paper provides a comprehensive literature review of both modeling and empirical studies. There are several qualitative implications. First, the patterns of capital flows depend on the nature of demographic shocks (permanent or transitory; fertility or mortality) and also on the stage of demographic shocks. Second, less generous pension systems tend to increase national saving and drive capital outflows. Third, financial frictions such as borrowing constraints of young people tend to increase national saving and drive capital outflows. Fourth, production and trade specialization in labor-intensive sectors tends to decrease investment and drive capital outflows in the face of fertility growth. Fifth, the magnitude of the demographic effects depends on the extent of cross-border mobility of capital, labor and goods. There are also several quantitative implications. First, demographics alone can explain a significant fraction of historical current account dynamics among advanced economies, especially low-frequency movements. Second, institutional and financial frictions need to be incorporated to reconcile the demographic effects with historical capital flows from emerging to advanced economies. Third, production structure and trade specialization also play an important role in demographics-driven capital outflows from emerging economies. On the other hand, empirical studies strongly support that the demographic change since the second half of last century has statistically significant effects on the current account balance. The current account tends to decrease in the dependency ratio, and increase in the working-age population share. This paper also points out the potential research direction.

Re-examining public debt and current account dynamics: SVAR evidence from Ethiopia

PurposePublic debt management is now an integral part of overall macroeconomic management in many developing and emerging market economies. Preventing unsustainable debt accumulation and maintaining healthy fiscal profile begins with understanding its key drivers both in the short and in the long run. The purpose of this paper is to analyze public debt and current account dynamics in Ethiopia.Design/methodology/approachThis study applies structural vector auto-regressive (SVAR) model on annual time series data to study general government debt and current account dynamics in Ethiopia for the period 1980–2018.FindingsBoth the impulse response and forecast error variance decomposition results confirm that fiscal balance exerts the strongest influence on both government debt and current account balance in the short run. In addition, own shock as well as shocks stemming from gross fixed capital formation and growth have significant effects on general government debt. The findings were robust to alternative data transformation, differing Choleski ordering of the model variables, and inclusion of exogenous deterministic terms that capture changes in the political landscape.Practical implicationsThe most important implication is that since fiscal balance is the strongest determinant of both public debt and current account balance, public investment efficiency is relevant here than anywhere else in the national economy. A recent study by Barhoumi et al. (2018) found that the sub-Saharan region lags behind its peers in terms of public sector investment efficiency with inefficiency gap of as large as 54% depending on the indicator variable for public investment output. Improving public investment spending efficiency would reduce government debt by enhancing productivity and growth – which has significant negative effect on public debt.Originality/valueFirst, the few studies conducted on Ethiopia are dominated by single equation specifications and do not account for the possibility of endogenous feedback effects among the model variables. Second, still equally important is the role of rising gross fixed capital formation in Ethiopia, which increased from about 13% (relative to GDP) in the 1980s to about 35% in the 2010s. Ignoring this variable amounts to a major model misspecification when analyzing short-run macro dynamics in low-income economies. Finally, the paper complements existing limited studies on Ethiopia by comparing the strength of shock propagation mechanisms using alternative data transformation techniques.

Current account drivers and exchange rate regimes in Central and Eastern Europe

The paper seeks to determine the factors that drive the current account dynamics of the 11 EU members from Central and Eastern Europe (CEE). Panel data models are estimated on annual data for the period 1997–2017 and both domestic pull factors and external push factors are included. The models are, as a key innovation, estimated separately for floating and fixed exchange rate regimes. The current account exhibits substantial persistence in both cases. For the floaters, the current account is driven by domestic factors while external factors appear unimportant. For the fixers, the current account is mainly driven by external factors, suggesting there is substantial vulnerability to external developments. The analysis underscores the importance of the exchange rate regime for the drivers of the current account balance in the CEE countries.