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Dynamics of Current Account Deficit: A Lesson from Pakistan

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  • Syed Jawaid

    ()

  • Syed Raza

    ()

Abstract

This study investigates the determinants of the current account deficit in Pakistan by using the annual time series data for the period from 1976 to 2010. The cointegration results suggest the positive and significant long run relationship of the current account deficit with the exchange rate, trade deficit and fiscal deficit while a significant negative relationship is found with external debt and private saving. The error correction model also confirms the significant positive relationship of the current account deficit with trade deficit and fiscal deficit in the short run. The Granger-causality test shows the bidirectional causal relationship of exchange rate and external debt with current account deficit. While, unidirectional causality is found from current account deficit to trade deficit and private savings. It is recommended that the government needs to be cautious in financing its fiscal deficit. Savings habits should be increased to narrow the investment gap in economy. Copyright Springer-Verlag Wien 2013

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File URL: http://hdl.handle.net/10.1007/s11300-012-0251-5
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Bibliographic Info

Article provided by Springer in its journal Transition Studies Review.

Volume (Year): 19 (2013)
Issue (Month): 3 (February)
Pages: 357-366

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Handle: RePEc:spr:trstrv:v:19:y:2013:i:3:p:357-366

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Web page: http://www.springerlink.com/link.asp?id=112913

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Related research

Keywords: Current account; Saving; Fiscal deficit; Trade deficit; External debt; Exchange rate; F32; E21; E62; F13; F35; F31;

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  1. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  2. César Calderón & Alberto Chong & Norman Loayza, 1999. "Determinants of Current Account Deficits in Developing Countries," Working Papers Central Bank of Chile 51, Central Bank of Chile.
  3. Hanan Morsy, 2010. "Current Account Determinants For Oil-Exporting Countries," Working Papers 511, Economic Research Forum, revised Mar 2010.
  4. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
  5. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
  6. Hamid Faruqee & Guy Debelle, 1996. "What Determines the Current Account? a Cross-Sectional and Panel Approach," IMF Working Papers 96/58, International Monetary Fund.
  7. Kwalingana, Samson & Nkuna, Onelie, 2009. "The Determinants of Current Account Imbalances in Malawi," MPRA Paper 14694, University Library of Munich, Germany.
  8. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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