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Re-assessment of sustainability of current account deficit in India: Insights from threshold cointegration and NARDL analysis

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  • Mallick, Lingaraj

Abstract

I examine the sustainability of CAD by employing both linear and threshold cointegration (Enders and Siklos, 2001) and Engle-Granger (1987) from the period 1960 to 2019. Results of the threshold and Engle-Granger cointegration confirm long-run equilibrium association between exports and imports indicating strong presence of sustainability of CAD in India. This reveals that after certain threshold level of current account deficit i.e., 3%, both export and import have different speed of adjustment towards long-run and their adjustment is asymmetric in nature. These results reveal that after certain threshold level of current account deficit, there should be systematic policy to adjust short-run behaviour of imports to bring back to the long-run for sustainability of current account deficit in India. The policy makers should consider the nonlinear behaviour of current account deficit while formulating any policy prescription towards sustainability of current account deficit in India. The export sector has to be encouraged and the import sector has to be restricted by implementing tight import restricted policies. Further, based on the threshold cointegration and asymmetric error correction mechanism, after estimated threshold, both exports and imports react differently to short-run positive and negative shocks. However, sufficient condition of intertemporal budget constraint is not satisfied by NARDL method. Overall findings conclude that CAD in India is weakly sustainable. Following the empirical results some policy suggestions are suggested.

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  • Mallick, Lingaraj, 2025. "Re-assessment of sustainability of current account deficit in India: Insights from threshold cointegration and NARDL analysis," Research in Economics, Elsevier, vol. 79(2).
    • Handle: RePEc:eee:reecon:v:79:y:2025:i:2:s109094432500016x
    DOI: 10.1016/j.rie.2025.101039
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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