On the sustainability of current account deficits: evidence from four ASEAN countries

Abstract

This paper examines the sustainability of the current account imbalance for four ASEAN countries (Indonesia, Malaysia, the Philippines and Thailand) over the 1961-1999 period.To this end, we utilize the intertemporal budget constraint (IBC) model to explain the behavior of the current account in these countries. The analysis is based on various unit root and cointegration procedures including those allowing for a structural break to deal with the major shortcomings of previous studies. The empirical results indicate clearly that for all countries, except Malaysia, current account deficits were not on the long-run steady state in the pre-crisis era. This leads us to conclude that the current accounts of these countries were unsustainable and did not move towards external account equilibrium. Moreover, the persistent current account deficits might serve as a leading indicator of financial crises. In contrast, we find strong comovement between inflows and outflows in Indonesia, the Philippines and Thailand in the period including the post-crisis years, while Malaysia was on an unsustainable path. This is because macroeconomic performance of most of the ASEAN countries has changed dramatically since the onset of the Asian crisis in mid-1997. The evidence suggests that action to prevent large appreciations should have been taken prior to the 1997 crisis. JEL classification: F30, F32

Long-Run Relationship between Exports and Imports of Pakistan

“…The statistical results of the study also lead to the conclusion that Pakistan is not violating its budget constraint. These findings are align with Bahmani-Oskooee and Rhee (1997), Wu and Zhang (1998), Arize (2002), Baharumshah et al (2003), Choong et al (2004), Emmy et al (2009), Irandoust andEricsson (2004), Uddin (2009), andMukhtar andRasheed (2010) but differ from TangTang (2006) , Konya and Singh (2008), Jalil (2008), Dumitriu et al (2009), andHye andSiddiqui (2010). Furthermore, the coefficient of long run relationship between exports and imports estimated by ARDL Model is 0.85196 that indicates that exports do not respond equally to imports, which happens to be one of the major causes of trade deficit in developing countries like Pakistan.…”

“…Statistical results lead to the conclusion that exports and imports do have a long run relationship in case of thirty-five countries and international budget constraints are sustainable for these specific thirty-five countries. Baharumshah et al (2003) found that exports and imports are co-integrated for Indonesia, Philippines, and Thailand by employing co-integration approach on annual data for the period: 1961 to 1999.The same study, by using the same estimation technique and data set concluded that exports and imports of Malaysia are not co-integrated. Contrast to this, another study conducted by Choong et al (2004) found that exports and imports of Malaysia are co-integrated and converge to long run equilibrium and concluded that Malaysia is not violating international budget constraints.…”

Re-examining purchasing power parity for East-Asian currencies: 1976–2002

“…An examination of the data, as well as, our recent research findings on the current account balances of the severely crisis-affected countries indicates that the current account swung from a large deficit to surplus after the currencies of these countries took a sharp fall. Indeed, the study by Baharumshah et al (2003) shows that after the crisis all the crisis-affected East Asia countries maintained current accounts that are sustainable. The sensitivity of the cointegration results to the regime that was noted above carries the policy implication that the exchange rates of the East Asia countries were possibly misaligned, i.e., overvalued, during the pre-crisis period.…”

Time Series Behavior of Imports and Exports of Bangladesh: Evidence from Cointegration Analysis and Error Correction Model

“…Arize (2002) explained that cointegration between exports and imports is an important element for formulating macroeconomic policies intended to achieve trade balance. Baharumshah et al (2003) got existence of cointegrating relationship between imports and exports for Indonesia, Philippines, Thailand, but not for Malaysia.…”