Current Account Deficit Research Articles

Dollar Liquidity, Financial Vulnerability and Monetary Sovereignty

ABSTRACTPeriods of dollar‐led global monetary tightening generate negative effects in many lower‐ and middle‐income countries. The tightening cycle which commenced in early 2022 has exacerbated the financial dislocation experienced by countries including Zambia, Sri Lanka and Pakistan. How can policy makers protect their economies from such external shocks and foster a stable developmental environment? Some recent contributions argue that the capacity of countries to insulate domestic policy from global financial conditions depends upon ‘monetary sovereignty’. This contribution argues that this misrepresents the constraints to macroeconomic policy and development strategy. Monetary sovereignty, if narrowly defined, is necessary but not sufficient for domestic policy autonomy. Stronger definitions impose unrealistic requirements on debt denomination and exchange rate regimes. The authors argue that, outside of currency unions, the main policy constraints for developing countries are limited domestic productive capacity and integration into global trade and financial networks rather than monetary arrangements. The discussion is illustrated with an empirical examination of three recent episodes of global illiquidity and/or policy tightening: the 2013 taper tantrum, the March 2020 liquidity shock and the 2022 dollar tightening cycle. The authors find evidence that monetary sovereignty does not insulate a country from episodes of dollar illiquidity. While ‘fundamentals’ such as current account deficits and foreign exchange reserves provide limited power in identifying vulnerability, measures of financial depth and activity do appear related to vulnerability.

The Price (and Costs) of Macroeconomic Stability in Peru: Some Lessons on the Implications of FDI‐driven Growth

ABSTRACTIn the period 2000–2019, Peru enjoyed sustained GDP growth and a long period of macroeconomic stability; as a result, poverty was reduced markedly in comparison to the 1980s and early 1990s, when the country faced severe recessions and hyperinflation. This positive economic performance coincided with the implementation of a mainstream macroeconomic framework which, alongside favourable external conditions, allowed for continuous external financing of current account deficits, mainly through foreign direct investment (FDI). Against the background of current debates regarding the resurgence of debt crises and the advocacy of FDI as a way to avoid such crises, this article uses balance of payments and international investment position statistics to assess whether Peru's acquired macroeconomic stability can be deemed sustainable. Drawing on the contributions of the Latin American structuralist school and more recent analyses that have raised concerns, the article shows that Peru's external position has taken on a Ponzi profile, casting doubt on the idea that FDI is a superior way of external financing compared to external debt. It concludes with a discussion of the social and environmental implications of Peru's widely praised macroeconomic framework, highlighting the limits that peripheral economies face when their growth relies excessively on external financing.

Persistent external deficits and balance of payments crises

Persistent external deficits are a recurrent phenomena in low and middle income countries. We define a new empirical measure to study balance of payment crises related to the accumulation of persistent external deficits. Using a non-parametric difference-in-differences estimator we estimate a critical value for the accumulated current account deficits associated with a crisis. Countries that have increased their net external indebtedness by an accumulated amount of at least 26%–31% of the GDP in a time span of 3 to 5 years are more vulnerable to suffer a crisis, which includes a consumption fall of 3.1% and a current account reversal of 4.9 percentage points of GDP. These crises are far more severe than an average sudden stop. Thus, our empirical results suggest that fast accumulation of external debt though current account deficits is related to severe crises.

Development of the Methodology for Residential Investment Management During the Covid-19 Pandemic

Investing in residential property is a good investment instrument for individuals. The benefit of investing in a residential property is the potential for long-term appreciation in value. Historically, property values have increased over time, providing a solid return on investment for those who hold onto their properties for a significant amount; property provides a source of passive income through rental income. Investing in property is an attractive investment opportunity in emerging markets. Turkey is considered an emerging market. Like many emerging markets, it faces several economic and political challenges, including high inflation, a large current account deficit, and political instability. Investing in property in emerging markets also comes with certain risks, including currency fluctuations, political instability, and uncertain legal and regulatory environments. During the SARS outbreak, the property market in Hong Kong was significantly affected. The Spanish flu pandemic had a significant impact on the property market. During the 19th-century cholera pandemics, there were instances of substantial disruption to property markets. The COVID-19 had significant impacts on the residential market. Developing a methodology for individuals to use for their residential investment can be challenging, as it requires consideration of various factors. There are a variety of resources available for individuals who are interested in learning more about investing in property, and people are able to educate themselves in the field of property investment. In this study, we examined individuals' residential property investments in Turkey during COVID-19, and the factors that influenced their investments. We examined whether individuals' consideration of a single advantage in residential investments provides them with financial benefits. We examined the parameters that residential investors can follow to achieve success with their investments.

COĞRAFİ AĞIRLIKLI REGRESYON İLE YÜKSEK TEKNOLOJİ İHRACATININ MEKANSAL ANALİZİ

The development of High-Technology Exports (HTE) contributes to the increase of competitiveness and growth in national production, the development of commercial and economic cooperation with foreign countries, and the diversification of the economy. In addition, high technology exports reduce the current account deficit of the country's economy. Therefore, high-tech industries have become indispensable for economic development in a country. The aim of this study is to examine the existence of spatial (neighbourhood) relations of countries in high-technology exports. In this study, Exploratory Regression analysis was applied to determine the model that best explains HTE among the variables. Moran Index was used for spatial autocorrelation, Geographical Weighted Regression (GWR) method for spatial regression analysis, and Ordinary Least Squares (OLS) method, to compare with the GWR method. The GWR model established in this study showed that countries have a weak or strong spatial relationship with their neighboring countries in terms of HTE. It has been observed that this spatial relationship is strong in the countries neighboring China, which ranks first in HTE, while the spatial relationship is weak in countries where HTE is low.

Dynamic Effects Of Interaction Between Economic Growth, Investment And Savings With International Trade In Indonesia

Anticipation of economic uncertainty needs to be done to avoid the brink of crisis by maintaining the pace of economic growth, investment and savings climate as well as smooth international trade. This study aims to analyze and explore the dynamic relationship interaction between economic growth variables projected as Gross Domestic Product (GDP), investment, gross domestic savings and international trade of the Indonesian state with data in the period 1971-2020 obtained from the worldbank.org website. The research method uses the Vector Auto Regression (VAR) analysis model with the development of Impulse Response Function (IRF) and Variance Decomposition (VDC) analysis to explain the response of a variable to the shock of the variable itself and other variables. The results of the analysis revealed that the one-way relationship for the variables of investing, saving, and trading was influenced by the variable itself with a lag of one. In addition, the results of IRF analysis show that the variable response of economic growth, investment, savings and international trade is dominated by shocks to economic growth variables, and the results of VDC analysis show that economic growth variables most contribute to the variable response of economic growth itself, investment, savings and international trade. The results of this study can be used as a reference for the formulation of anticipatory policies by the government and Bank Indonesia in preventing the risk of economic crisis by maintaining macroeconomic variable stability so that the level of domestic market confidence is maintained in the outlook. Therefore, the policy stages that can be carried out are to control inflation, reduce the current account deficit, maintain fiscal balance and improve in managing foreign debt.

Current account imbalance and the inequality ratio of income to consumption: evidence from China and other Asian countries

This paper deals with global imbalances as an increasingly important issue in our age. While the literature establishes that current accounts are inversely related to the ratio of income to consumption inequality in OECD, our study finds that this relationship is reversed in Asia. That ratio has much to do with various schemes of consumption smoothing, which are affected by policy interventions to alleviate the effects of rising income inequality. Different policies may generate opposite outcomes. In OECD, policy encourages consumer credit and deficit spending among low-income people so that consumption inequality is kept artificially low, leading up to a current account deficit. In Asia, policy promotes output growth via high savings with no well-developed smoothing schemes designed to help poor households, so that consumption inequality moves in line with income inequality, with excess savings recycled into a current account surplus. Hence, any reduction in global imbalances requires both regions to adjust their policies for mitigating income inequality and optimizing smoothing schemes.

International Borrowing and Lending in the Presence of Oligopolistic Competition

This paper examines the implications of imperfect competition in a two-country framework where a single good is produced. Using an overlapping generation model, we analyze the effects of market structures. Specifically, one country is assumed to operate under a perfectly competitive market structure, while the other country operates under an oligopolistic market structure. Our analysis reveals that the differences in factor prices between the two countries when they are in autarky lead to intergenerational trade once their capital markets are integrated. A key finding is that the country with an oligopolistic market structure becomes a lending country, while the country with a competitive market structure becomes a borrowing country. Furthermore, we find that the country with an oligopolistic market structure, serving as a lender, experiences a current account surplus, while the country with a perfectly competitive market structure, acting as a debtor, incurs a current account deficit.

The relationship between energy technology, energy efficiency, renewable energy, and the environment in Türkiye

This study aims to investigate the effects of technological advancements, energy efficiency, and renewable energy utilization in Türkiye's fossil fuel sector on CO2 emissions and to test the applicability of the Environmental Kuznets Curve (EKC) hypothesis. The EKC hypothesis has been confirmed for Türkiye, revealing an inverse U-shaped relationship between CO2 absorption and per capita income. Furthermore, all variables display negative coefficients and show statistical significance in the long term. Thus, it has been established that technological progress, energy efficiency, and the adoption of renewable energy have a positive impact on reducing CO2 emissions. Given Türkiye's status as an energy importer heavily dependent on fossil fuels, prioritizing technological advancements in the energy sector is crucial since complete abandonment of fossil fuels in the near future is unlikely. Moreover, efficient energy utilization plays a vital role in reducing energy imports, a substantial contributor to Türkiye's current account deficit. Furthermore, an increase in renewable energy will have a positive effect on Türkiye's economic and energy outlook. The uniqueness of these findings lies in the utilization of these significant variables, which have not been previously employed in the context of the Türkiye economy.

Energy imports as inhibitor of economic growth: The role of impact of renewable and non-renewable energy consumption

ABSTRACT This study investigates the role of energy imports in domestic production function in the case of 15 energy-importing countries for the period of 1995–2015. Apart from energy imports, renewable energy consumption, non-renewable energy consumption, capital, trade openness, and urbanization are included in the growth model. In doing so, long-run elasticity coefficients are estimated with the Dynamic Seemingly Unrelated Regressions (DSUR) model after determining the cointegration relationship between the variables. In addition, for robustness checks, Panel Correlated Standard Errors (PCSE) and Feasible Generalized Least Squares (FGLS) estimators are applied. Our results show that renewable energy consumption, non-renewable energy consumption, trade openness, and capital have a positive effect on economic growth. Energy imports negatively affect economic growth. The Dumitrescu-Hurlin causality analysis reveals a bidirectional causality relationship between renewable energy consumption, capital, trade openness, urbanization, and economic growth. A unidirectional causality relationship exists from economic growth to non-renewable energy consumption and energy imports. This analysis can be interpreted as having a negative impact on economic growth by putting pressure on the current account deficit due to energy imports. Therefore, investments in the renewable energy sector will play an important role in economic growth.

Public policy and strategic business recommendations to accelerate adoption of stationary battery energy storage systems (BESS) in India

PurposeInterest in battery energy storage systems (BESS) is high, and technologies such as Li-ion (and other advanced chemistry) batteries in specific use cases are already economically viable. In this paper, the authors build further on the authors' previously published paper1 to estimate the potential positive impact that accelerated adoption of Li-ion batteries for stationary storage per the authors' identified already economically viable use cases, can have both on India's macro-economy and current account deficit as well as in helping meaningfully accelerate circular economy and Sustainable Development Goals (SDG) benefits of green economy transition.Design/methodology/approachThe authors identified key challenges for development of BESS ecosystem and applied quantitative and qualitative assessment methodology for rapid adoption of BESS in India. The authors' study was validated through interviews with stakeholders and the authors summarize applicable findings for emerging countries such as India to encourage faster, wider adoption of energy storage.FindingsThe authors' study provides key policy recommendations to achieve a better balance in policy focus—not only for electronic vehicles (EVs) and utility-scale storage, but also for stationary behind-the-meter storage through key policy measures including placing a CESS on diesel generators (DGs), differential tariffs, encouraging advanced battery imports as a way to reduce crude oil imports, green financing and investments in de-carbonized energy breakthrough technologies (e.g. gravity-based energy storage systems). The authors recommend key technology priorities and strategic business rationale for private sector efforts by developing competitive advantages for non-battery hardware and software and expanding into emerging markets, with potential US$15–20+bn enterprise value.Originality/valueWhile the dominant discourse focuses on EVs and utility scale applications of storage, the authors' paper shows the larger near term opportunity for impact is in stationary storage that too in end-user adoption use cases.

Predicting The Share of Tourism Revenues In Total Exports

Tourism revenues are a significant source of income under the current account service item of countries. These revenues are not included in exports, despite being compared with the export revenues of the countries and in economics the ratio of tourism revenues to export revenues is used as an indicator. In developing economies, tourism revenues play a role in closing the current account deficit. The prediction of this rate in countries with foreign trade deficit is important in developing tourism, export and import policies for the future. In this study, multiple linear regression method (MLR), one of the traditional methods, and the artificial neural network method (ANN), one of the machine learning methods were used to estimate the rate of tourism revenues of the sample country Turkey to its export revenues. In the model of the study covering 2004-2020 period, the number of tourists received, total income from tourism, average expenditure by tourists per capita, population, total export revenue, growth rate, Euro/TL and US Dollar/TL rates were chosen as independent variables. As a result of the study, the R2 value was found to be 91.7% for ANN and 90.8% for MLR which were very close to the ideal value. According to the predicts made on the model developed based on this, the rate of Turkey's tourism income to total export income in 2025 is estimated as 31.83% according to ANN; 32.73% according to MLR while in 2030, it is estimated to be 33.25% according to ANN and 36.78% according to MLR.

Does Twin Deficit Hypothesis Exist in India? A Structural Break Co-integration Analysis

The primary focus of this study is to examine the long-term and short-term impact of fiscal deficit (FD) on the current account deficit (CAD) in India over the period of 1980 to 2021 in the presence of inflation and exchange rate. For the estimation of data series, the study employed autoregressive distributed lag (ARDL) co-integration test and Gregory Hansen (GH) co-integration test with endogenous structural break. The empirical results from ARDL bounds tests fail to provide a long-run relationship for the variables. The threshold co-integration test (GH) estimation suggests a strong evidence of a co-integration relationship for the variables and the break year is found in 2005. Thus, the findings validate the twin deficit hypothesis in the long-run as the FD has a positive significant effect on a CAD in India. Similarly, the long-run estimates of inflation have a positive significant effect on the CAD. It implies that an increase in rate of inflation distorts the CAD in the long-run. Consequently, the government of India should control the price hike and make macroeconomic situations favourable for domestic tradable sectors. The results from the Granger causality technique show bidirectional causality between FD and CAD implies the twin deficit in India. Based on the empirical findings, it may be argued that the Central Bank of India should try to reduce the prolonged CADs and retain stability in the domestic currency.

Green Growth and the Balance‐of‐payments Constraint

ABSTRACTThe notion of green growth emphasizes environmental and climate policies that make economic activities more sustainable while contributing to higher growth. In developing countries, the ability of such policies to help solve the most pressing economic challenges is essential for green growth to be a viable concept. Notably, current account deficits, foreign exchange shortage and external debt accumulation are serious obstacles to economic development. The analysis in this article therefore approaches green growth from a new perspective. With a focus on energy, the article estimates the impact of the transition from fossil fuels to renewable energy on the balance‐of‐payments constrained growth of energy‐importing developing and emerging economies. It assumes that their current economic structure otherwise remains the same. Since renewable energy production is more efficient than fossil fuel combustion and reduces import dependence, the energy transition increases the annual balance‐of‐payments constrained growth rate of the selected countries by up to 2.5 percentage points on average in a scenario from the present until 2050. This means that policies in favour of renewable energy allow those countries to grow faster without accumulating foreign debt or even triggering currency crises. Consequently, staying with the current fossil fuel‐based energy system implies missing a significant potential for growth and development.

Effects of Fiscal Variables on External Sector Deficit of Nepal with Reference to Indian Factors

The basic intent of this paper is to examine the effects of fiscal variables on trade and the current account deficit of Nepal considering the Indian factors. Using the time series data of 48 years of the study period from 1975 to 2022, Engle-Granger’s co-integration and error correction models are used to examine the fiscal effects on the trade deficit, and the ARDL model is used to examine the effects on current account deficit. The basic variables used in the analysis are government expenditure to GDP ratio, budget deficit to GDP ratio, trade deficit to GDP ratio, broad money supply to GDP ratio, trade openness, real exchange rate, and real per-capita Indian GDP. Data are taken from the Ministry of Finance, Nepal Rastra Bank, and World Development Indicators. The findings show that the government expenditure to GDP ratio and trade openness positively affect the trade deficit as domestic factors, while real per-capita Indian GDP positively affects the trade deficit as an external factor. Also, the budget deficit to GDP ratio has a positive effect, while the broad money supply to GDP ratio has a negative effect on the current account deficit as domestic factors. The real exchange rate is negatively and real Indian per-capita GDP are positively driving the Nepal’s current account deficit as external factors. This study identifies the real exchange rate with Indian rupees, Indian real per-capita GDP, and financial development as novel explanatory variables of current account deficit and therefore provides additional evidence on external deficit in the context of Nepal.

Twin Deficits Revisited: The Role of Fiscal Institutions in Pakistan

The economy of Pakistan is facing the problem of the persistent current account and the budget deficit in the past many years. This study addresses the important question of whether the budget deficit affects the current account components of the balance of payments, creating imbalances therein as well. The main objective of this research is to investigate the association between the budget and the current account deficit in Pakistan. The study has taken data from the period 1980-2021. Johansen’s cointegration approach has been applied to find the long-run association and the results imply a positive and considerable long-run association between budget deficit and current account deficit. The Vector Error Correction Model (VECM) specifies the convergence or deviation of the market in the short run to the long run. The finding shows that there is a long-run connection between the budget and the current account deficit. The study suggests that government should focus on a sound budgeting policy and focus to make exports more competitive in the foreign market.

Do capital inflows affect domestic bank credit? Empirical evidence from India

This paper studies multivariate dynamic analysis of capital inflows in relation with domestic bank’s credit which has not been investigated earlier adequately in the context of Indian economy. Using autoregressive distributed lag (ARDL) model, we find the existence of co-integration over the period 1991 Q3 to 2022 Q1. The long-run ARDL regression model results show net equity inflows, i.e. net foreign direct investment, and net non-equity inflows, i.e. foreign loan, are significant to influence domestic bank credit. Result also reveals that depreciation of exchange rate and current account (trade) deficit increase bank credit. Outcome of this research contributes significantly to frame effective monetary policy in the Indian context.

DEPENDENCY ON IMPORTED ENERGY IN TURKEY: INPUT- OUTPUT ANALYSIS

The main goal of this paper is to reveal the extent of the import dependency on electricity, gas, steam, and air conditioning supply (EGSA), the basic component of energy, in Turkey. Such that growing industrialization in Turkey has expanded the need for energy since many sectors use energy as input to produce output. However, Turkey’s domestic production fails to meet the energy demand. For this reason, Turkey meets approximately 75 percent of its energy needs through imports, leading to an increase in the current account deficit. Energy imports, approximately 20 percent of total imports, have become the primary component of the current account deficit, exposing the Turkish economy to instabilities in global gas and oil prices and several additional risks. In this context, we analyzed the extent of the dependency on energy by the input-output tables of 2002 and 2012. The results underline that as production increases, energy imports increase, and the economic leakage generated by the rise in demand for energy increases. This creates a significant obstacle to the development of the Turkish economy. Hence, existing policies for domestic energy production need to be strengthened for sustainable development goals and to decrease the high current account deficit in Turkey.

Econometric analysis of foreign trade and economic growth relationship in Azerbaijan and Italy

The aim of this study, unlike the studies in the literature, is to investigate whether the causal relationship between economic growth, export and import changes over time. In this study, it was analyzed whether the foreign trade of Azerbaijan and Italy had an effect on economic growth between 1992 and 2020. Granger causality and unit root test were used in the study. According to the test results, a causal relationship between growth and foreign trade has been determined for the Azerbaijan economy. However, a causal relationship between growth and foreign trade could not be determined for the Italian economy. According to the results of the analysis, the reason why such a relationship does not exist for Italy is due to the fact that growth is a factor that increases current account deficits and foreign trade deficit. In the relationship between foreign trade and economic growth, the direction and importance of the relationship may change according to the country and period. According to the Granger causality test, it has been determined that Azerbaijan's economic growth is the cause of its exports and imports with Italy with the condition of 10%. However, it has been determined that the foreign trade with Azerbaijan is not the reason for the economic growth of Italy.

Revisiting the Twin Deficit Hypothesis in presence of exchange rate nonlinearities: evidence from India using nonlinear ARDL model

PurposeThis paper is an attempt to re-examine the validity of the Twin Deficit Hypothesis in the Indian economy, which is characterised by mounting inequality and liquidity constraints. The authors augment the econometric analysis with two important mediating variables, exchange rate and trade openness, to analyse their impact on current account deficit.Design/methodology/approachThe authors have used a ground-breaking asymmetric cointegration technique proposed by Shin et al. (2014) to investigate the short-run and long-run asymmetric nexus between gross fiscal deficit and current account deficit. In addition, the study has used asymmetric dynamic multipliers to see the dynamics of nonlinear adjustment from disequilibrium in the short run to equilibrium in the long run. The study has also used generalised impulse response functions to check the robustness of our cointegration results.FindingsUsing annual time series data from 1970 to 2018, the empirical exercise validates the presence of asymmetries in the Twin Deficit Hypothesis for the Indian economy. This study's robust findings demonstrate that the two deficits are asymmetrically related in the long run. The authors also found that exchange rate asymmetrically affects current account deficit thus validating the asymmetric J-curve phenomenon. From the causality analysis, the authors infer that there is a weak unidirectional causality running from fiscal deficit to current account deficit.Research limitations/implicationsFiscal deficit may cause current account deficit via changes in other macroeconomic variables that were not taken care of in this study. Therefore, the estimation techniques used in the present study might suffer from the issue of omitted-variable bias. Further research should include other macroeconomic variables where the twin deficit nexus is also influenced by other relevant variables. This will help in disentangling the indirect transmissions by which fiscal deficit translates into current account deficit.Practical implicationsThe results from our econometric exercise strongly suggest that the twin deficits are asymmetrically related. From a policy perspective, the asymmetric twin deficit nexus offers strong policy implications for the development of policies that are flexible enough to respond to shifts in internal and external sector dynamics. While framing the mechanism of fiscal prudence, policymakers in emerging countries like India must take into account the regime-changing behaviour of twin deficits.Originality/valueThe present paper is a significant contribution to the existing body of literature by being the first study in India which has analysed the Twin Deficits phenomenon in a nonlinear framework with the incorporation of asymmetric exchange rate dynamics in the model.