Register  |  Login  |  Inquiries  |  Sitemap
Advanced Search
Journal of Economic Integration 2005 September;20(3) :514-529.
DOI: https://doi.org/10.11130/jei.2005.20.3.514
Current Account Deficit Sustainability: a Panel Approach
Ahmad Zubaidi Baharumshah
Evan Lau and 
Stilianos Fountas 
Universiti Putra Malaysia
Universiti Malaysia Sarawak
University of Macedonia
Copyright ©2005 Journal of Economic Integration
ABSTRACT
In this paper we attempt to examine the issue of sustainability of current account imbalances in eight East Asia countries using the latest developments in nonstationary panel data analysis. The methods of nonstationary time series panels provide a much more promising explanation than would an analysis based on pure time series or cross section data. The empirical results clearly indicate that the current account imbalances were not on the long-run steady state in the pre-crisis era (1970-1997). This leads to the conclusion that the current accounts of Asia-8 during this period were unstable and did not move towards external account equilibrium. However, strong comovements between exports and imports are found in the extended sample period that includes the post-crisis period (1970-2000). This result implies that large currency depreciations and the economic recovery have brought the Asia-8 economies back on a sustainable path. Thus, current account imbalances may be used as an indicator (or warning signal) in predicting future crises.

JEL Classification
F30: General
F32: Current Account Adjustment; Short Term Capital Movements
Keywords: Current account deficits | Sustainability | Panel cointegration | Asian economies
 
REFERENCE
1. Azali, M, Habibullah, M. S. and Baharumshah, A.Z. (2001) Does PPP hold between Asian and Japanese Economies? Evidence Using Panel Unit Root and Panel Cointegration, Japan and World Economy, 13, 35-50.
2. Adedeji, O.S. (2001) The Size and Sustainability of Nigerian Current Account Deficits, IMF Working Paper No. 87
3. Apergis, N., Katrakilidis, K. P. and Tabakis, N. M. (2000) Current Account Deficit Sustainability, Applied Economics Letters, 7, 599-603.
4. Baharumshah, A.Z. (2001) The Effect of Exchange Rate on Bilateral Trade Balance: New Evidence from Malaysia and Thailand, Asian Economic Journal, 15, 291-312.
5. Baltagi, B. and Kao, C. (2000) Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey, in Baltagi, Badi, Fomby, Thomas B. and Hill, R. Carter (ed.), Advances in Econometrics : Nonstationary Panels, Cointegration in Panels and Dynamic Panels, Vol: 15, 7-51.
6. Banerjee, A. (1999) Panel Data Unit Roots and Cointegration: An Overview, Oxford Bulletin of Economics and Statistics, 61, 607-629.
7. Cashin, P. and McDermott, C. J. (1998) Are Australia's Current Account Deficits Excessive?, The Economic Record, 74, 346-361.
8. Campbell, J.Y. and Perron, P., (1991) Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots, in Olivier J. Blanchard and Stanley Fischer (ed.), National Bureau of Economic Research Macroeconomics Annual, MIT Press, Cambridge, 144-201.
9. Engle, R.F. and Granger, C.W.J. (1987) Cointegration and Error Correction: Representation, Estimation and Testing, Econometrica, 55, 251-276.
10. Fountas, S. and Wu, J-L. (1999) Are the U.S. Current Account Deficits Really Sustainable?, International Economic Journal, 13, 51-58.
11. Glick, R., Hutchison, M. and Moreno, R (1995). Is Pegging Exchange Rate A cure for Inflation? East Asian Experience, Pacific Basin Working Paper Series, No. PB95-08, Center for Pacific Basin Monetary and Economic Studies, Federal Reserve Bank of San Francisco.
12. Hakkio, C. S. and Rush, M. (1991) Is the Budget Deficit ‘Too Large’?, Economic Inquiry, 29, 429-425.
13. Holman, J A. (2001) Is the Large US Current Account Deficit Sustainable?, Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 5-23.
14. Hossain, F. (1999) Transitory and Permanent Disturbances and the Current Account: An Empirical Analysis in the Intertemporal Framework, Applied Economics, 31, 965-974.
15. Husted, S. (1992) The Emerging U.S. Current Account Deficit in the 1980s: A Cointegra-tion Analysis, The Review of Economics and Statistics, 74, 159-166.
16. Im, K.S., Pesaran, M.H. and Shin, Y. (1997) Testing for Unit Roots in Heterogeneous Panels, Working Paper, University of Cambridge.
17. Irandoust, M. and Boo S. (2000) The Behavior of the Current Account in Response to Unobservable and Observable Shocks, International Economic Journal, 14, 41-57.
18. Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimated and Inference on Cointegration with Application to the Demand for Money, Oxford Bulletin of Economics and Statistics, 52, 169-210.
19. Kao, C. and Chiang, M.-H. (2000) On the Estimation and Inference of a Cointegrated Regression in Panel Data, in Baltagi, Badi, Fomby, Thomas B. and Hill, R. Carter (ed.), Advances in Econometrics: Nonstationary Panels, Cointegration in Panels and Dynamic Panels, Vol: 15, 179-222.
20. Levin, A. and Lin, C.F. (1993) Unit Root Tests in Panel Data: New Results, University of California at San Diego (UCSD) Discussion Paper No. 56.
21. Mann, C., (2002) Perspectives on the US current account deficit and sustainability, Journal of Economic Perspectives, 16, 131-152.
22. Milesi-Ferretti, G. M. and Razin, A. (1996) Current Account Sustainability: Selected East Asian and Latin American Experiences, National Bureau of Economic Research (NBER), Working Paper No. 5791.
23. Obstfeld, M. and Rogoff, K. (1996) Foundations of International Macroeconomics, The MIT Press, Massachusetts.
24. Otto, G. (1992) Testing a Present Value Model of the Current Account: Evidence from US and Canadian Time Series, Journal of International Money and Finance, 11, 414-430.
25. Pedroni, P. (1997) Panel Cointegration, Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis: New Results, Indiana University Working Paper in Economics.
26. Pedroni, P. (1999) Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors, Oxford Bulletin of Economics and Statistics, 61, 653-670.
27. Schwartz, A. (2003) Interpreting the US current account deficit, manuscript prepared for the Shadow, Open Market Committee meeting, November 9-10.
28. Shibata, A. and Shintani, M. (1998) Capital Mobility in the World Economy: An Alterna-tive Test, Journal of International Money and Finance, 17, 714-756.
29. Shiller, R.J. and Perron, P. (1985) Testing the Random Walk Hypothesis: Power versus Frequency of Observation, Economics Letters, 39, 381-386.
30. Wickens M.R. and Uctum, M. (1993) The Sustainability of Current Account Deficits: A Test of the U.S. Intertemporal Budget Constraint, Journal of Economic Dynamics and Control, 17, 423-441
31. Wu, J-L. (2000) Mean Reversion of the Current Account: Evidence from Panel Data Unit-Root Test, Economics Letters, 66, 215-222.
32. Wu, J-L., Chen, S-L. and Lee H-Y. (2001) Are Current Account Deficits Sustainable? Evidence from Panel Cointegration, Economics Letters, 72, 219-224.
33. Yan, H-D. (1999) Intertemporal Current Account Balance and the East Asian Currency Crisis, International Advances in Economic Research, 5, 277-288.
TOOLS
PDF Links  PDF Links
Full text via DOI  Full text via DOI
Download Citation  Download Citation
Supplement  Supplement
  E-Mail
Share:      
METRICS
2
Crossref
0
Scopus
1,861
View
14
Download
Editorial Office
Center for Economic Integration, Sejong Institution, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-3408-3338   E-mail : jei@sejong.ac.kr
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration. All right reserved.