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Can an Inter-temporal Model Explain India's Current Account Balance?

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  • Khundrakpam, J. K.
  • Ranjan, Rajiv

Abstract

Employing an inter-temporal model on a constructed private consumption series, the paper finds that the current account balance in India during 1950-51 to 2005-06 is intertemporally solvent. This is primarily a reflection of the developments that have taken place during the post-reform period, when restrictions on capital flows have been significantly liberalised. We do find some evidence of asymmetry between capital flows, which is on expected lines as restrictions on capital outflows from India are more than those on inflows to India. The study finds that the optimal current account balance has been larger than the actual current account balance. This is intuitively appealing as there were severe foreign exchange restrictions in the pre-reform period which restricted the smoothing of private consumption up to the optimal level. With further liberalisation of capital flows, both inflows and outflows, it would be possible for agents to further smoothen their consumption to desired optimal level, allowing scope for higher current account deficit to attain potentially higher growth.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50928.

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Date of creation: Mar 2008
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Publication status: Published in Reserve Bank of India Occasional Papers No. 1, Summer 2008.29(2008): pp. 1-17
Handle: RePEc:pra:mprapa:50928

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Related research

Keywords: Current account; Consumption-smoothing; Inter-temporal;

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References

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  1. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
  2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  3. Agenor, Pierre-Richard & Bismut, Claude & Cashin, Paul & McDermott, C. John, 1999. "Consumption smoothing and the current account: evidence for France, 1970-1996," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 1-12, January.
  4. Glenn Otto, 2003. "Can an Intertemporal Model Explain Australia's Current Account Deficit?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(3), pages 350-359.
  5. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Wiley Blackwell, vol. 31(59), pages 369-84, December.
  6. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
  7. Kunhong Kim & Viv B Hall & Robert A Buckle, 2001. "New Zealand's Current Account Deficit: Analysis based on the Intertemporal Optimisation Approach," Treasury Working Paper Series 01/02, New Zealand Treasury.
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Cited by:
  1. Suranjana Nabar-Bhaduri & Matías Vernengo, 2012. "Service-led growth and the balance of payments constraint in India: An unsustainable strategy," Working Paper Series, Department of Economics, University of Utah 2012_06, University of Utah, Department of Economics.
  2. Tahir Mukhtar & Aliya H. Khan, 2011. "The Current Account Dynamics in Pakistan: An Intertemporal Optimisation Perspective," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 401-421.

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