The Current Account Deficit Sustainability: An Empirical Investigation for Pakistan (original) (raw)
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Theory of intertemporal budget constraints is applied to current account deficits of Pakistan for 1980:1-2004:2 periods. The aim of this study is to demonstrate whether the foreign debt arising from deficit current accounts policies has sustainability in the current economic policies of Pakistan. By means of the revenues and expenditures of current accounts, it is tested if current account deficits are too large. The results obtained have demonstrated that current account deficits are not sustainable.
Modelling the determinants and Sustainability of Current Account of Pakistan
The study investigated the determinants of the current account deficit from 1976 to 2020 for the economy of Pakistan, and its sustainability. The persistent deficit is necessary to be sustainable if it will be paid off shortly otherwise it will pile up external debt. The conventional methodology concluded that current account deficit (CAD) of Pakistan is unsustainable, albeit one measure suggests sustainability. There is cointegration among variables and domestic saving, external debt, fiscal deficit and trade deficit has positive whereas exchange rate and worker's remittances have a negative relation with the current account, all the results are significant. The negative sign of the error correction term confirms restoration of equilibrium and it is also significant. Bidirectional causality is reported between the worker's remittances, exchange rate and external debt with CAD. Unidirectional causality is seen from CAD to trade deficit and fiscal deficit. The diagnostic tests of the model confirm robustness. The government should favour an investment-friendly environment to increase economic activity in the country besides improving domestic savings and reducing the external deficit.
Dynamics of Current Account Deficit: A Lesson from Pakistan
This study investigates the determinants of the current account deficit in Pakistan by using the annual time series data for the period from 1976 to 2010. The cointegration results suggest the positive and significant long run relationship of the current account deficit with the exchange rate, trade deficit and fiscal deficit while a significant negative relationship is found with external debt and private saving. The error correction model also confirms the significant positive relationship of the current account deficit with trade deficit and fiscal deficit in the short run. The Granger-causality test shows the bidirectional causal relationship of exchange rate and external debt with current account deficit. While, unidirectional causality is found from current account deficit to trade deficit and private savings. It is recommended that the government needs to be cautious in financing its fiscal deficit. Savings habits should be increased to narrow the investment gap in economy.
Dynamics of Current Account Deficit: A Lesson from Pakistan First Author
2012
2 This study investigates the determinants of current account deficit in Pakistan by using the annual time series data for the period 1976 to 2010. The cointegration results suggest the positive and significant long run relationship of current account deficit with exchange rate, trade deficit and fiscal deficit, while significant negative relationship is found with external debt and private saving. The error correction model also confirms the significant positive relationship of current account deficit with exchange rate, trade deficit and fiscal deficit in short run. The Granger-causality test shows the bidirectional causality run from exchange rate and external debt to current account deficit. However, unidirectional causality is found from current account deficit to external debt and fiscal deficit. It is recommended that government needs to be cautious in financing its fiscal deficit. Savings habits should be increase to narrow the investment gap in economy.
Current account sustainability: A non-linear comparative empirical overview
Panoeconomicus, 2018
This study aims to examine the sustainability of current account deficits for Hungary, Poland, Czech Republic and Turkey over the period 1998Q1:2014Q2, with a special attention to the Turkish case, by applying the theoretical model of Steven Husted (1992). The main motive for the choice of time span is that the period comprises the outcomes of two important crises Turkish economy experienced in 2001 and 2008. The empirical testing procedure of the sustainability is twofold so as to be linear and non-linear. Both linear and non-linear test results provide evidence that the current account deficit is unsustainable for Turkey, Poland and Czech Republic. On the other hand, linear and non-linear test results lead to a conflicting evidence for Hungary. We conclude that there is a need to reduce the current account deficit for the countries examined. Otherwise, a sharp adjustment may be inevitable.
The objective of the present paper is to explore the sustainability of external position of Turkey over the period 1987Q 1-2008Q 2 by using the intertemporal approach to current account as well as some important macroeconomic indicators. The empirical methodology used to test the intertemporal model of the current account in this paper is the present value test. Turkey experienced large external deficits and over-valuation of the national currency over the period 2004Q 1-2008Q 2. The empirical evidence presented in this paper indicates that current account deficits of Turkey were unsustainable over the period 1987Q 1-2008Q 2. Furthermore, the empirical results of external sustainability reveal that the actual current account deficits were excessive relative to the optimal current account balances over the period 2004Q 1-2008Q 2. Özet Bu makalenin temel amacı cari işlemler hesabına ilişkin dönemlerarası yaklaşımı ve bazı önemli makroiktisadi göstergeleri kullanarak, Türkiye'nin c...
Kunal Books, Daryaganj, New Delhi - 110002, 2022
This study looks at the intertemporal sustainability of five South Asian nations’ current account deficits from 1980 to 2020. By applying the recent econometric methods, it shows that there exists a long-run equilibrium relationship between exports and imports, and the current account series is found to be stationary for two South Asian economies such as Bangladesh and Sri Lanka. On the other hand, it proves that for the rest of the selected South Asian economies including India, Nepal, and Pakistan, it does not identify any long-run equilibrium relationship between exports and imports, and also the current account series is found to be non-stationary at the level and stationary at first difference. Hence, the research confirms that while the current account deficits of Bangladesh and Sri Lanka are sustainable in the long run, it is not sustainable for the rest of the selected South Asian countries. The findings have important policy implications for South Asian economies in terms of collaborating to enhance trade and investments in order to achieve long-term current account sustainability. Keywords: Current account deficit, Sustainability, Intertemporal budget constraint
Sustainability of Current Account Deficit in Turkey
International Journal of Business and Economic Sciences Applied Research
This study aims to examine the sustainability of the current account deficit in Turkey for the quarterly data between 2003 and 2018. Besides, some policy implications are made to ensure the sustainability of the current account deficit in Turkey's economy. Design/methodology/approach: The dynamics related to the sustainability of the current account deficit is analysed within the framework of the "intertemporal budget constraint approach" developed by Husted (1992). The long-term dynamics are empirically investigated using the Johansen cointegration test. Econometric analysis is also expanded within the framework of the Vector Error Model to reveal the short-term dynamics. Findings: The results of Johansen cointegration analysis suggest that current account income and expenses are integrated with the cointegrating coefficient less than 1, implying that Turkey has a weak form of current account deficit sustainability. Findings of the Vector Error Correction model confirm the results of long-run analysis and indicates that the deviations from the long-term equilibrium are corrected at a rate of 78% every quarter term. Research limitations/implications: The "intertemporal budget constraint approach" developed by Husted (1992) focuses on the equilibrium between current account income and expenses to analyse the sustainability of the foreign balance. However, the sustainability of the foreign deficit is also closely related to what kind of capital inflows is used to finance the foreign deficit. Therefore, the implications made regarding the sustainability of the current account deficit in Turkey based on the Husted model should be accepted with some reservations. Originality/value: Since external imbalances are a key challenge for most of the developing countries to provide full integration into the world economy, many empirical studies are examining the current account sustainability. The majority of these studies focus on the long-run dynamics of the current account imbalances. Unlike most of the previous studies, this paper also focuses on the short-run dynamics of the current account balance. Thus, the difference of this study from other studies stems from the examination of the dynamics of current account sustainability not only in the long term but also in the short term.
The Current Account Dynamics in Pakistan: An Intertemporal Optimisation Perspective
The Pakistan Development Review
The intertemporal approach has become a basic reference in open economy macroeconomics for the theoretical understanding of the current account. Since the early 1980s there has been substantial growth in the literature using this approach to analyse the behaviour of the current account movements for different countries and time periods. The theoretical refinements in the approach have led most of the empirical studies in the literature today to apply the basic present value model of current account (PVMCA) and its extended version to examine the fluctuations in the current account balances of both developed and developing countries. Using data on Pakistan over the period 1960 to 2009, the present study finds that the basic model fails to predict the dynamics of the actual current account. However, extending the basic model to capture variations in the world real interest rate and the real exchange rate significantly improves the fit of the intertemporal model. The extended model pre...
An Empirical Analysis of Sustainability of Trade Deficit of Pakistan
SSRN Electronic Journal, 2000
This paper empirically investigates the long run convergence of exports and imports for Pakistan's economy. The cointegration approach based on Johansen (1995) method of Full Information Maximum Likelihood (FIML) is used. The results show that trade flows are cointegrated implying the country is not in violation of its international budget constraint. Therefore it suggests that overall Macroeconomic policies are effective in bringing imports and exports into an equilibrium in the long-run. The results imply that trade imbalances are short-run phenomena and are sustainable in the long-run.