What Determines the Current Account? A Cross-Sectional and Panel Approach

Factors influencing India's current account balance: Implication for achieving its external sector sustainability

“…This section reviews the literature on determinants of CAB. Debelle and Faruqee (1996), using a panel of 21 industrial countries, found that income, government debt and demographic factors influence the CAB, while fiscal surplus, terms of trade and capital control have no impacts in the long run. By using unbalanced panel data for 44 developing countries, Calderon et al (2002) observed that economic growth, terms of trade and real exchange rate appreciation worsen the current account deficit.…”

“…The existing literature has tested this approach for both individual countries and across the countries mainly in two directions. While a set of studies tried to establish the evidence in favour of a baseline model using different testing strategies (Bergin & Sheffrin, 2000;Nason & Rogers, 2006), another group of studies examined the long-run and short-run relationships between current account performance and a set of macroeconomic determinants by applying various econometric techniques (Chinn & Prasad, 2003;Debelle & Faruqee, 1996;Gruber & Kamin, 2007). Our analysis follows the second approach as it explores the determinants of CAB.…”

“…For the emerging countries, witnessing high and volatile current account imbalances, an important question arises: What are the factors that determine their CAB, given their some of the common structural features or current and future economic challenges. The extant literature in economies, especially in areas of international trade and energy economics (Calderon, Chong, & Loayza, 2002;Chinn & Prasad, 2003;Debelle & Faruqee, 1996;Debelle & Galati, 2007;Huntington, 2015;Kraay & Ventura, 2000;Yang, 2011), has identified that there are several factors that can exert pressure on this indicator, such as fiscal deficit or debt burden, capital inflows, international trade openness, exchange rate and domestic factors like income, population dependency ratio, consumption, investment/savings, financial deepness, etc. However, taking a look at an individual emerging country perspective like India which has been attempting to liberalize the economy on a sustained basis since 1991, after following almost four decades of planned development strategy since independence, it may rather give some interesting insight from a developing economy's perspective, while examining how the Indian economy has been managing its current account performance in relation to its other macroeconomic parameters.…”

Current account deficit across South Asia: A Second Generation Methodological Adaptive Approach

“…Using both panel data and cross-sectional approach, Debelle and Faruqee (1996) showed that real exchange rate, terms of trade and the business cycle have short-run effects on current account where stage of development and demographics have longer-run effects.…”

“…Their study, however, was limited to only industrial countries and therefore do not provide much evidence about the countries where industrialization is not that severe. Later, Calderón, Chong, and Loayza (2002) extended the work of Debelle and Faruqee (1996) by focusing on 44 developing economies. They adopted a reduced form approach to study the relationship between current account deficit and its determinants.…”