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The current account-interest rate relation: A panel data study for OECD countries

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  • Meliha ENER

    (Department of Economics, Canakkale Onsekiz Mart University)

  • Feyza ARICA

    (Department of Economics, Canakkale Onsekiz Mart University)

Abstract

The issue of the current account is important for policy makers, since it provides information about quantity of foreign resources that must be borrowed to fund domestic investment. This study examines the relationship between current account balance as a percentage of GDP and real interest rate over the period from 1980-2009 for a sample of 21 OECD countries that are high income economies using recent developed panel estimation techniques. The two-way panel estimation technique is used in order to investigate the relationship between the selected variables. The two-way Panel OLS estimation results show that there is a positive relationship between current account and real interest rate as expected. This finding illustrates the fundamental understanding of the role of real interest rate in determining the current account balance for high income economies, and it is useful for policy considerations. From policy perspective, we can say that the authorities can overcome current account imbalances by altering interest rates.

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Bibliographic Info

Article provided by E3 Journals in its journal E3 Journal of Business Management and Economics..

Volume (Year): 3 (2012)
Issue (Month): 2 ()
Pages: 048-054

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Handle: RePEc:etr:series:v:3:y:2012:i:2:p:048-054

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Related research

Keywords: Monetary policy; Current account imbalances; Real interest rate; The Two- way Panel Data Model;

References

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  1. Philip R. Lane & Gian Milesi-Ferretti, 2001. "Long-Term Capital Movements," NBER Working Papers 8366, National Bureau of Economic Research, Inc.
    • Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136 National Bureau of Economic Research, Inc.
  2. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  3. Roger C. Kormendi & Aris Protopapadakis, 2004. "Budget Deficits, Current Account Deficits And Interest Rates: The Systematic Evidence On Ricardian Equivalence," Macroeconomics 0403010, EconWPA.
  4. Michel Normandin & Martin Boileau, 2004. "The Current Account and the Interest Differential In Canada," Cahiers de recherche 04-09, HEC Montréal, Institut d'économie appliquée.
  5. Rubaszek, Michał, 2012. "The Role Of Two Interest Rates In The Intertemporal Current Account Model," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S2), pages 176-189, September.
  6. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
  7. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  8. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  9. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
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