Persistent Current Account Deficits Research Articles

Sri Lanka’s Foreign Exchange Crisis: An Examination of Causality Dynamics, Shedding Light on Suggestive Way-Out Strategies

The present research endeavoured to undertake a diagnostic analysis pertaining to the foreign exchange crisis faced by the Sri Lankan economy, intending to identify drivers of the crisis and to throw light on possible strategies to overcome the crisis. An extensive literature survey was conducted, followed by a descriptive analysis based on available data. Trend analysis, deploying graphical method, was adopted as the main analytical technique, and the results were interpreted using political economic reasoning. The outcomes of the study revealed that Sri Lanka has been experiencing persistent current account deficits as well as increasing foreign debt stock since 1977, the year in which economic liberalisation policies were implemented. In that respect, the Sri Lankan crisis closely resembled that of the Indian crisis more than those explained by the other crisis models found in literature. It could thus be inferred that the persistent trade and current account deficits owing to uncontrolled imports ever since liberalisation, and the resultant accumulation of foreign debt, have been the drivers of the foreign exchange crisis in Sri Lanka, while weak and undisciplined public finance policies, failure to move into high value-added and strategic industrialisation and wide income inequality would have been possible support factors. Therefore, the research outcomes yielded caution signals if policy makers consider availing further liberalisation of the economy as the remedial strategy to surmount the present crisis.

Macro-determinants of current account balance performance in selected African countries

AbstractMost African countries are open to international trade as shown by their signatories to various trade agreements such as the Economic Partnership Agreement (EPA) with the EU, and the Forum on China-Africa Cooperation (FOCAC). However, these countries face persistent current account deficits and institutional underdevelopment. The existing literature investigates the underlying factors at country-specific levels while ignoring the role of institutions. Meanwhile, African countries are also rapidly transitioning towards economic integration with the establishment of the African Continental Free Trade Area Agreement (AFCFTA) to deepen intra-Africa trade. Therefore, for unionized policy proposition, this study controls for the effects of institutions and investigates the macro-determinants of the current account balance (CAB) performance using panel data from 2002 to 2020 for 20 African countries. To account for cross-country correlation and country-level heteroscedasticity, the study employed panel-corrected standard errors (PCSE) and feasible generalized least squares (FGLS) techniques for the governance indicators-related step-wise estimations. The results show that after controlling for the effects of institutions, income, trade openness, the price level, the interplay between manufacturing and financial sector development, and the money supply are the significant macro-determinants of the CAB performance in Africa. Further, the marginal info-graphics show that the predictive effects of value addition and financial development on the CAB increase positively with good governance and that improved governance could reverse any negative effects of trade openness on the CAB performance. Based on the findings, the study recommends inter alia that African countries pursue value-addition-oriented trade, zero Central Bank budgetary financing, and institutional quality improvement to enhance the performance of their CABs.

Nexus between Current Account Balance, Price Stability, and Economic Growth in India: An empirical analysis

A prominent theme of structuralist macroeconomics has been the crucial role that the current account imbalance plays in shaping macroeconomic developments in emerging market economies. The persistent current account deficit may cause macroeconomic instability, notably in the general price level. The balance of payment crisis in India in the late 1980s and early 1990s is a case in point. The post-COVID macroeconomic development also hinted at the significant role of the current account balance. This study seeks to examine the relationship between the current account component of the balance of payments, price stability (captured by the Consumer Price Index) and economic growth (captured by GDP) in the economy of India, from 1996. At the outset, we check how the current account deficit explains the inflationary conditions, and the surplus supports stability – and their contributions to economic growth. The interdependence is found significant in causality and integration analyses.

The Effect of Tourism on Current Account Balance in Ethiopia

Ethiopia is one of the countries that experience a persistent current account deficit, despite it has recently realized a steady double-digit economic growth. International tourism can serve as an alternative means to minimize current account deficit through generating foreign currency to the economy. Therefore, this paper investigated the effect of tourism on current account balance in Ethiopia. Besides, causality between tourism and current account balance is tested. Further, this study has tried to identify the main challenges of tourism development sector in Ethiopia. ARDL methods of co-integration and Granger causality test was used to explore the relationship and causality between the variables, respectively. The result from the econometric analysis confirmed that tourism industry positively and significantly affects current account balance, implying it is an alternative means to minimize current account deficit through generating foreign currency to the economy. The pair-wise Granger-causality test also confirmed the existence of unidirectional causality that runs from tourism receipt to current account balance. However, the trend analysis and qualitative analysis clearly showed that the tourism sector has been challenged by many factors. Lack of infrastructures development, poor and inadequate tourist facility (quality and adequacy); lack of qualified manpower; lack of peace and security; lack of stakeholder’s collaboration; inadequate promotional or marketing works and lack of awareness and low participation of the community are among the major challenges mentioned by the respondents. Hence, coordinated and integrated public intervention aimed at further developing tourism sector and curbing the existing bottlenecks in the sector is necessary to fully utilize the constructive role of tourism industry in minimizing the persistent current account deficit in Ethiopia.

Глобальные дисбалансы: эволюция подходов

The article examines the current state and causes of global imbalances’ sustainability – the phenomenon whereby some major systemic countries run large and persistent current account deficits, which are mirrored by large surpluses in a number of other countries. The widening of global imbalances during COVID 19 pandemic contrasts with their dynamics during previous global downturns, when the scale of imbalances narrowed. The article analyzes various explanations of global imbalances: intertemporal choice with a difference in the rates of return, demographic changes, global savings glut, dynamics of oil prices, exchange rate manipulations, twin deficits, demand for safe assets. The significance of each of the causes of global imbalances changes over time, and currently fiscal policy has been playing an increasing role to determine the movements of current account deficits. The global fiscal response to the pandemic, especially in advanced economies, has been unprecedented, which led to significant reduction in government savings. The scale and dynamics of global imbalances are largely determined by the state of the US balance of payments: it is a reflection of the ability to generate safe assets and to finance trade and budget deficits cheaply by using the dollar’s status as the dominant world currency. There are differences in theoretical approaches regarding the macroeconomic effects of global imbalances. But persistent current account deficits and surpluses lead to accumulation of stock imbalances – the difference between countries’ foreign assets and liabilities. The ongoing negative changes in the net international investment positions of many leading advanced economies indicate an increase in external indebtedness. This creates risks to both debtor and creditor countries and threatens the stability of the global financial system.

Persistent Current Account Deficits and Balance of Payments Crises

Persistent Current Account Deficits and Balance of Payments Crises

Türkiye ve Ana Ticaret Partnerleri için J Eğrisinin Geçerliliğinin Analizi: Panel Veri Yaklaşımı Uygulaması

External trade cannot create the expected result for some countries due to their economic structures or policies. Economies could encounter severe foreign trade deficits and the risk of an economic crisis. Thus, researchers and policymakers analyse the dynamics of countries’ external trade balances. Turkey’s persistent current account deficit is one of the most significant macroeconomic problems. Turkey depreciated the Turkish Lira against foreign currencies to reduce its foreign trade deficit in the past. Using panel data analysis, the current study tests the J-curve for Turkey and its six main foreign trade partner countries - Russia, USA, Germany, UK, Italy, and China. Results do not support the validity of the J-curve hypothesis in the long run. Test results analysing the short-run indicate that the whole panel is statistically insignificant.

The Consolidation of Dollar Hegemony After the Collapse of Bretton Woods: Bringing Power Back in

ABSTRACT Conventional views on the collapse of Bretton Woods suggest that it resulted from its own limitations. The inability of the United States to manage the system given the growing imbalances associated to the need of persistent current account deficits to provide liquidity in dollars, and the resulting inflationary pressures on the one hand, and the increasing disproportion of dollars and gold reserves, on the other, would bring about the end of the system. In other words, the Triffin Dilemma was ultimately correct, and the exorbitant privilege came with a high price tag. The limitations of the dominant view about Bretton Woods are discussed and it is argued that the end of Bretton Woods was a political decision that led to the consolidation of dollar hegemony. The limitations of the conventional view are ultimately tied to mainstream economics.

Persistent current account imbalances: Are they good or bad for regional and global growth?

This paper examines the regional and global growth effects of current account imbalances in Japan, Germany, and the People’s Republic of China (PRC)—the three largest persistent surplus countries—and the United States and United Kingdom, the two largest persistent deficit countries. Controlling for a set of macroeconomic determinants, we use a structural vector autoregression (SVAR) framework to show that positive shocks to current account balances in the PRC, Germany, and Japan transmit positive regional and global growth effects, particularly in the case of spillovers to regional growth from Japan. As expected, the global growth response is lower in magnitude than the regional growth response. In addition, the extent of the effect is amplified by global value chains, pointing to the significant role played by trade in intermediate goods. For current account deficit countries, the magnitudes of the responses of growth to shocks are much lower on average than in the case of current account surplus countries. We find some marginal positive effects on regional and global growth emanating from a positive shock on the UK current account—i.e., a reduction in the deficit. For the US, a positive shock to its persistent current account deficit marginally drags on global growth, possibly reflecting declining import demand and wealth effects linked to the US dollar’s status as the global reserve currency. Our findings have important policy implications, particularly in light of discussions in recent years on whether current account surplus countries are hindering growth abroad.

The impact of macroeconomic policies on Tunisian current account, an ARDL approach

During 1980-2010 Tunisian current account deficit was persistent and worsens between 2011-2018 following the Jasmine revolution of 2011 and contribute to slow down country growth and development. The objective of this study is: 1) to examine the linkage between persistent Tunisian current account deficit and a broad set of macroeconomic variables related to fiscal, monetary and trade policies between 1980-2018; 2) enlighten policy makers in their decision-making process related to the adjustment mechanisms. Based on ARDL approach, the key findings of this study show robust empirical evidence of short and long-run effects of fiscal and monetary policies, while the effect of trade policy is only apparent in the short-term. Therefore, we conclude that, in the short-term, both a tight monetary policy and a balanced fiscal budget are necessary to adjust the current account balance. However, these reforms are not sufficient; making the Tunisian current account deficit sustainable requires structural changes to the economy over the long-term.

Systemic Debt Crises in International Disequilibrium System

Global Savings Glut (GSG) hypothesis has become the predominant and official theory attempted to explain the global financial crisis of 2008 and the Great Recession of 2008 – 2009. “… it is impossible to understand this crisis without reference to the global imbalances” (Bernanke, 2009). Any possible “global imbalance” must be connected to the international terms of trade and international exchange rate mechanism. GSG theory argues that the overwhelming credit (debt) growth occurred in the U.S. prior 2008, was due to savings made by certain trading partners, which resulted for the U.S. to have a persistent Current Account deficit and prevented the ability to increase interest rates by the U.S. monetary authorities to reduce current account deficit, as significant capital inflows from those countries took place. Yet, the paper observes that debt crises take place in countries where there are Current Account surpluses. This conundrum needs to be examined. Hence, the paper finds that another empirically verifiable proposition could possibly be used to explain the systemic debt crises better.

Crisis in Turkey: Estimating the Potential Welfare Loss?

ABSTRACT While large and persistent current account deficit and external debt stock are among the most common causes of economic crises, measuring the risk associated with them is not easy. The literature typically focuses on the total external debt stock and the size of the current account deficit, which provide limited information. This study proposes a more accurate risk index by measuring the real size of the external debt stock and considering how external resources are utilized. Once external borrowing becomes a significant risk factor, a painful adjustment process starts in the form of slow growth or a crisis. Our index measures the extent of risk and the potential cost of the adjustment process. We empirically test the accuracy of our index by using the experiences of a number of selected countries affected by the 2008 crisis and show that the index can explain 77% of the variation in real consumption in those countries. By using the empirical results, we also estimate the potential cost that Turkey might experience once the currency crisis develops into a full-blown crisis.

Ball and chain effect: Is Turkey’s growth rate constrained by current account deficit?

Persistent and unsustainable current account deficits imply continuous foreign borrowing. In this study, we investigate the causal relationship between Turkish current account deficits (CAD) and growth, by using both traditional Granger and Frequency Domain Causality Tests developed by Breitung and Candelon (BC hereafter) over the period of first quarter of 2002 to the first quarter of 2017, since there is scarcely any definitive empirical study out there yet, systematically exploring the causal relationship between GDP growth and current account over short- and longer run. The results of the study indicate that rising CAD unidirectionally causes growth in both short- and medium-run. Thus, since CAD is financed mostly by short-term debt-creating inflows and Turkey is considered to be the most credit-dependent country across all emerging markets, while Turkey’s excessive reliance on foreign credit comes at the cost of extremely volatile real GDP growth rates, our result raises many doubts about sustainability and stability of future growth trajectory in Turkey.

Persistent Current Account Imbalances: Are they Good or Bad for Regional and Global Growth?

We examine the regional and global growth effects of current account imbalances in Japan, Germany, and the People’s Republic of China (PRC)—the three largest persistent surplus countries—and the United States and United Kingdom, the two largest persistent deficit countries. Controlling for a set of macroeconomic determinants, we use a structural vector autoregression framework to show that positive shocks to current account balances in the PRC, Germany, and Japan transmit positive regional and global growth effects, particularly in the case of spillovers to regional growth from Japan. As expected, the global growth response is lower in magnitude than the regional growth response. In addition, the extent of the effect is amplified by global value chains, pointing to the significant role played by trade in intermediate goods. For current account deficit countries, the magnitudes of the responses of growth to shocks are much lower on average than in the case of current account surplus countries. We find some marginal positive effects on regional and global growth emanating from a positive shock on the UK current account—i.e., a reduction in the deficit. For the US, a positive shock to its persistent current account deficit marginally drags on global growth, possibly reflecting declining import demand and wealth effects linked to the US dollar’s status as the global reserve currency. Our findings have important policy implications at the global level, particularly in light of the re-emergence of discussions on global imbalances in recent years.

European imbalances and shifts of global value chains to the Central European periphery: role of institutions

This article deals with the topic of European imbalances. They are defined as large and persistent differences in the current account position of European countries, which are closely connected to the emergence of the financial crisis and the subsequent sovereign debt crisis in 2008. A build-up in current account deficits had been observed from the mid-1990s, namely in two peripheral regions of the EU. However, little attention was paid to the potential differences between the Southern and Central European peripheries of the EU. The emergence of large and persistent current account deficits in Southern Europe was accompanied by a significant shift in gains from global value chains. The aim of this paper is to evaluate the factors that co-determined the changes in the geographic structure of GVCs in Europe. These changes decreased GVC income in Southern Europe, increased it in Central Europe and contributed to the build-up of account imbalances in Southern Europe. Despite the fact that Central Europe was among the deficit regions in European imbalances, the four Central European countries substantially increased their gains from global value chains as well as GVC participation. The shift in GVC activity towards Central Europe between 1995 and 2011 was driven not only by total labour costs but also by better regulatory quality. At the same time, TNCs switching from Southern to Central Europe had to accept worse quality contract enforcement.

Tax and spending shocks in the open economy: Are the deficits twins?

We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.

American hegemony: intellectual property rights, dollar centrality, and infrastructural power

How does dollar centrality persist in the face of continuous US current account deficits and a steadily worsening net international investment position? Two mechanisms create a structural basis for dollar centrality, explaining how dollars enter global credit markets and why surplus countries continue to hold dollar-denominated assets. First, institutional structures deriving from late development suppress domestic demand in major current account surplus countries, making them reliant on external demand for growth. Local banks recycle those dollars into the global economy, creating huge dollar liabilities and assets on their balance sheets. This locks them into continued use of the dollar and reliance on the US Federal Reserve during crises. Second, US firms participating in the global unbundling of production have constructed commodity chains in which they capture disproportionate shares of global profits through their control over Intellectual property. These profits sustain valuations and thus the attractiveness of dollar-denominated assets. Routinization in use of the dollar and compliance with Trade-Related Aspects of Intellectual Property Rights (TRIPS) and US controlled commodity chains creates infrastructural power in Michael Mann’s sense. This routinization sustains US geo-economic power in the face of persistent current account deficits and growing net international debt relative to US gross domestic product.

Inequality, financialization, and the US current account deficit

AbstractThe US has run a persistent current account deficit since 1982. Its growth particularly accelerated in the early 2000s, and the deficit peaked at about 6% of US GDP in 2006. Coincidentally, the distribution of income and wealth has grown progressively unequal, while the so-called financialization of the US economy has deepened. This article argues that the concomitant processes of persistent current account deficits, rising inequality, and deepening financialization are not merely coincidental but can be traced to common causes arising from the global restructuring of US production through foreign direct investment and offshoring, which has underlain the structural transformation of the US economy since the 1980s. On the one hand, the US is the world’s biggest exporter of capital and recipient of foreign investment income; on the other hand, it is the biggest importer of foreign goods, often produced with the involvement of US capital. Ultimately, deindustrialization at home—a major factor behind the loss of middle-wage, middle-class jobs, and thus of rising income inequality—and the transnationalization of US production have boosted corporate profits, thereby propping up and accelerating the financialization of the US economy.

Brexit and the Future of UK Capitalism

Brexit and the Future of <scp>UK</scp> Capitalism

Tax and Spending Shocks in the Open Economy: Are the Deficits Twins?

We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.