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1 – 10 of over 1000Alfonso Camba-Crespo, José García-Solanes and Fernando Torrejón-Flores
This study aims to identify structural breaks in the current account and the periods between these breaks, which the authors name stability spells, and study their characteristics…
Abstract
Purpose
This study aims to identify structural breaks in the current account and the periods between these breaks, which the authors name stability spells, and study their characteristics and determinants.
Design/methodology/approach
Using data from the IMF and the World Bank, this study applies the Lee and Strazicich test to endogenously identify breaks and the Heckman selection model to simultaneously study the determinants of structural breaks and current-account changes after breaks.
Findings
This study identifies 212 significant structural breaks and 341 stability spells. These spells become shorter and more volatile the further they are from equilibrium, and half of them last 10 years or less. The results show that economic growth and foreign-exchange piling are particularly useful to prevent breaks, while lower per capita income increases exposure to break risks.
Originality/value
This study introduces the concept of current-account stability spells to refer to the periods between structural breaks. These spells are then studied to determine their main characteristics. The authors also apply a global perspective in their analysis, using a wide sample of 181 economies between 1980 and 2018 and considering positive and negative breaks in both level and trend.
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Shruti Shastri, A.K. Giri and Geetilaxmi Mohapatra
The purpose of this paper is to assess the sustainability of current accounts for five major South Asian economies, namely, India, Pakistan, Bangladesh, Sri Lanka and Nepal, for…
Abstract
Purpose
The purpose of this paper is to assess the sustainability of current accounts for five major South Asian economies, namely, India, Pakistan, Bangladesh, Sri Lanka and Nepal, for the period 1985–2016.
Design/methodology/approach
The study employs the intertemporal solvency model of Hakkio and Rush (1991) and Husted (1992). Autoregressive Distributed Lag bounds test, Gregory and Hansen’s test and Carrion-i-Silvestre and Sanso’s test are used to assess the cointegration between current account inflows and outflows. The coefficients of long-run relationship are obtained using dynamic ordinary least squares. Besides the econometric investigation, the study also examines some other indicators such as the composition of current account, size of external debt, etc., to shed further light on the sustainability of current accounts.
Findings
The study finds support for the long-run relationship between the current account outflows and inflows for all the countries. The estimates of slope coefficient indicate strong sustainability in case of India, Bangladesh and Nepal, whereas weak sustainability holds for Sri Lanka and Pakistan underscoring the need for policy interventions. In a comparative perspective, the current accounts in India, Nepal and Bangladesh conform more to a sustainable behavior in terms of the size of deficits, external debt stock and compliance to the intertemporal budget constraint.
Originality/value
The study employs econometric techniques allowing for structural breaks in the assessment of current account sustainability. Besides using the intertemporal model, the study also examines factors such as composition of current accounts, size of external debts, etc., to evaluate sustainability.
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Abdullah H. Aldlaigan and Francis A. Buttle
This study reports an empirical test of two involvement scales: Zaichkowsky’s personal involve‐ment inventory (PII) and Kapferer and Laurent’s consumer involve‐ment profile (CIP)…
Abstract
This study reports an empirical test of two involvement scales: Zaichkowsky’s personal involve‐ment inventory (PII) and Kapferer and Laurent’s consumer involve‐ment profile (CIP). The purpose of this study is to identify whether these two scales are applicable to financial services. Eight financial services are investigated: the use of a cheque book, overdraft facility, the use of Switch services, the use of a cash machine, savings account, investment services, mortgage services, and personal loan. The empirical findings show that the two scales indicate different levels of involvement in the eight financial services. The PII measure indicates that mortgage, investment and cash machine use are high involvement services. The use of savings account, personal loan, a chequebook, overdraft facility, and Switch services are found to be medium involvement services. The CIP shows that investment, mortgage, and savings accounts are rated as high involve‐ment services. Personal loans, overdraft facilities, Switch card, cash machine, and chequebook usage are in the middle range of involvement. Being a multidimen‐sional scale, the CIP provides more data about involvement. More investigation is needed in order to understand the links between consumer involvement in financial services and customer behaviour. The authors conclude with recom‐mendations for further research into consumer involvement in financial services and its effect on bank customer behaviour.
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Following the 1991 crisis, India undertook reforms that liberalized trade and investment. India faced current account deficits for most of the period following these reforms. This…
Abstract
Following the 1991 crisis, India undertook reforms that liberalized trade and investment. India faced current account deficits for most of the period following these reforms. This paper analyzes sustainability of India's current account position over the last decade using the intertemporal solvency model of Hakkio and Rush and Husted. In this theoretical framework, the intertemporal solvency constraint is satisfied if there is cointegration between inflows and outflows of the current account. This paper finds cointegration between the series when allowing for a structural break using the Gregory and Hansen procedure. Dynamic generalized least squares (GLS) estimation shows a strong relation between India's current account inflows and outflows. On the basis of the empirical results, this paper concludes that there has been an improvement in trade patterns and despite experiencing deficits, India's current account position is sustainable.
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Shahid Bashir and Tabina Ayoub
This paper is an attempt to re-examine the validity of the Twin Deficit Hypothesis in the Indian economy, which is characterised by mounting inequality and liquidity constraints…
Abstract
Purpose
This paper is an attempt to re-examine the validity of the Twin Deficit Hypothesis in the Indian economy, which is characterised by mounting inequality and liquidity constraints. The authors augment the econometric analysis with two important mediating variables, exchange rate and trade openness, to analyse their impact on current account deficit.
Design/methodology/approach
The authors have used a ground-breaking asymmetric cointegration technique proposed by Shin et al. (2014) to investigate the short-run and long-run asymmetric nexus between gross fiscal deficit and current account deficit. In addition, the study has used asymmetric dynamic multipliers to see the dynamics of nonlinear adjustment from disequilibrium in the short run to equilibrium in the long run. The study has also used generalised impulse response functions to check the robustness of our cointegration results.
Findings
Using annual time series data from 1970 to 2018, the empirical exercise validates the presence of asymmetries in the Twin Deficit Hypothesis for the Indian economy. This study's robust findings demonstrate that the two deficits are asymmetrically related in the long run. The authors also found that exchange rate asymmetrically affects current account deficit thus validating the asymmetric J-curve phenomenon. From the causality analysis, the authors infer that there is a weak unidirectional causality running from fiscal deficit to current account deficit.
Research limitations/implications
Fiscal deficit may cause current account deficit via changes in other macroeconomic variables that were not taken care of in this study. Therefore, the estimation techniques used in the present study might suffer from the issue of omitted-variable bias. Further research should include other macroeconomic variables where the twin deficit nexus is also influenced by other relevant variables. This will help in disentangling the indirect transmissions by which fiscal deficit translates into current account deficit.
Practical implications
The results from our econometric exercise strongly suggest that the twin deficits are asymmetrically related. From a policy perspective, the asymmetric twin deficit nexus offers strong policy implications for the development of policies that are flexible enough to respond to shifts in internal and external sector dynamics. While framing the mechanism of fiscal prudence, policymakers in emerging countries like India must take into account the regime-changing behaviour of twin deficits.
Originality/value
The present paper is a significant contribution to the existing body of literature by being the first study in India which has analysed the Twin Deficits phenomenon in a nonlinear framework with the incorporation of asymmetric exchange rate dynamics in the model.
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Harendra Kumar Behera and Inder Sekhar Yadav
The purpose of this paper is to examine the issue of high current account deficit (CAD) from various perspectives focussing its behaviour, financing pattern and sustainability for…
Abstract
Purpose
The purpose of this paper is to examine the issue of high current account deficit (CAD) from various perspectives focussing its behaviour, financing pattern and sustainability for India.
Design/methodology/approach
To begin with the trends, composition and dynamics of CAD for India are analysed. Next, the influence of capital flows on current account is investigated using Granger non-causality test proposed by Toda and Yamamoto (1995) between current account balance (CAB) to GDP ratio and financial account balance to GDP ratio. Also, the sustainability of India’s current account is examined using different econometrics techniques. In particular, Husted’s (1992), Johansen’s cointegration and vector error correction model (VECM) is applied along with conducting unit root and structural break tests wherever applicable. Further, long-run and short-run determinants of the CAB are estimated using Johansen’s VECM.
Findings
The study found that the widening of CAD is due to fall in household financial savings and corporate investments. Also, it was found that a large part of India’s CAD has been financed by FDI and portfolio investments which are partly replaced by short-term volatile flows. The unit root and cointegration tests indicate a sustainable current account for India. Further, econometric analysis reveals that India’s current account is driven by fiscal deficit, terms of trade growth, inflation, real deposit rate, trade openness, relative income growth and the age dependency factor.
Practical implications
Since India’s CAD has widened and is expected to widen primarily due to rise in gold and oil imports, policy makers should focus on achieving phenomenal export growth so that a sustainable current account is maintained. Also, with rising working-age and skilled population, India should focus more on high-value product exports rather than low-value manufactured items. Further, on the structural side it is important to correct fiscal deficit as it is one of the important factors contributing to large CAD.
Originality/value
The paper is an important empirical contribution towards explaining India’s CAD over time using latest and comprehensive data and econometric models.
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Sima Rani Dey and Mohammad Tareque
This study attempts to examine the twin deficits hypothesis for Bangladesh. Along with the traditional twin deficits hypothesis associated with the current account and fiscal…
Abstract
Purpose
This study attempts to examine the twin deficits hypothesis for Bangladesh. Along with the traditional twin deficits hypothesis associated with the current account and fiscal deficit, the paper also explores the causal relationship between the trade deficit and fiscal deficit.
Design/methodology/approach
We start with the investigation of the conventional twin deficit hypothesis employing autoregressive distributed lag (ARDL) bounds testing approach in a multivariate framework. Due to the absence of cointegration between the budget deficit and trade deficit, the study adopts a multivariate vector autoregressive (VAR) model to analyze the nexus.
Findings
The study supports the presence of the twin deficits hypothesis in Bangladesh, both in the short run and long run. Unidirectional causation running from the budget deficit to the current account deficit in the long run. The trade model also supports the twin deficit hypothesis, like the aforementioned current account model.
Practical implications
Therefore, the sustainable fiscal deficit is the key to maintain a stable current account deficit and trade deficit in Bangladesh.
Originality/value
The study incorporates the country risk indicators to address the governance issue while analyzing the models' deficit scenarios because good governance is an integral part of explaining the development outcome and failure of a country like Bangladesh.
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The purpose of this paper is to examine the long‐run sustainability of trade deficits for the ASEAN‐five economies, viz., Indonesia, Malaysia, the Philippines, Myanmar and…
Abstract
Purpose
The purpose of this paper is to examine the long‐run sustainability of trade deficits for the ASEAN‐five economies, viz., Indonesia, Malaysia, the Philippines, Myanmar and Thailand, in the presence of structural breaks.
Design/methodology/approach
It utilizes the Saikkonen and Lütkepohl cointegration procedure, allowing for structural breaks in the series. To determine endogenous structural breaks, the Lanne et al. unit root test is applied.
Findings
The study confirms a long run relation between exports and imports for Indonesia, Myanmar and Thailand; and finds sustainable long‐run trade deficit only for Myanmar.
Research limitations/implications
The results suggest that macroeconomic policies in Myanmar have been sustainable and effective in leading exports and imports to the long‐run steady state equilibrium. However, the paper did not find cointegration between exports and imports for Malaysia and the Philippines. This result suggests that macroeconomic policies have failed to establish; a long‐run equilibrium; and sustainable external (import and export) balance. For Indonesia and Thailand while the macroeconomic policies may give the appearance of being effective in establishing a long‐run equilibrium, the relation may not be sustainable, however.
Originality/value
The paper finds that despite the presence of structural breaks, Myanmar represents the only economy among the ASEAN‐five that is on a long‐run sustainable trade deficit. To the author's knowledge this the only work that examines sustainability of trade deficits using time series techniques that incorporates structural breaks in the context of ASEAN‐five with implication for trade openness policy. From that perspective the work can be seen as an original contribution to the literature.
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Public debt management is now an integral part of overall macroeconomic management in many developing and emerging market economies. Preventing unsustainable debt accumulation and…
Abstract
Purpose
Public debt management is now an integral part of overall macroeconomic management in many developing and emerging market economies. Preventing unsustainable debt accumulation and maintaining healthy fiscal profile begins with understanding its key drivers both in the short and in the long run. The purpose of this paper is to analyze public debt and current account dynamics in Ethiopia.
Design/methodology/approach
This study applies structural vector auto-regressive (SVAR) model on annual time series data to study general government debt and current account dynamics in Ethiopia for the period 1980–2018.
Findings
Both the impulse response and forecast error variance decomposition results confirm that fiscal balance exerts the strongest influence on both government debt and current account balance in the short run. In addition, own shock as well as shocks stemming from gross fixed capital formation and growth have significant effects on general government debt. The findings were robust to alternative data transformation, differing Choleski ordering of the model variables, and inclusion of exogenous deterministic terms that capture changes in the political landscape.
Practical implications
The most important implication is that since fiscal balance is the strongest determinant of both public debt and current account balance, public investment efficiency is relevant here than anywhere else in the national economy. A recent study by Barhoumi et al. (2018) found that the sub-Saharan region lags behind its peers in terms of public sector investment efficiency with inefficiency gap of as large as 54% depending on the indicator variable for public investment output. Improving public investment spending efficiency would reduce government debt by enhancing productivity and growth – which has significant negative effect on public debt.
Originality/value
First, the few studies conducted on Ethiopia are dominated by single equation specifications and do not account for the possibility of endogenous feedback effects among the model variables. Second, still equally important is the role of rising gross fixed capital formation in Ethiopia, which increased from about 13% (relative to GDP) in the 1980s to about 35% in the 2010s. Ignoring this variable amounts to a major model misspecification when analyzing short-run macro dynamics in low-income economies. Finally, the paper complements existing limited studies on Ethiopia by comparing the strength of shock propagation mechanisms using alternative data transformation techniques.
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