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The Current Account Dynamics in Pakistan: An Intertemporal Optimisation Perspective

Author

Listed:
  • Tahir Mukhtar

    (Department of Economics, Fatima Jinnah Women University, Rawalpindi)

  • Aliya H. Khan

    (School of Economics, Quaid-i-Azam University, Islamabad)

Abstract

The intertemporal approach has become a basic reference in open economy macroeconomics for the theoretical understanding of the current account. Since the early 1980s there has been substantial growth in the literature using this approach to analyse the behaviour of the current account movements for different countries and time periods. The theoretical refinements in the approach have led most of the empirical studies in the literature today to apply the basic present value model of current account (PVMCA) and its extended version to examine the fluctuations in the current account balances of both developed and developing countries. Using data on Pakistan over the period 1960 to 2009, the present study finds that the basic model fails to predict the dynamics of the actual current account. However, extending the basic model to capture variations in the world real interest rate and the real exchange rate significantly improves the fit of the intertemporal model. The extended model predictions better replicate the volatility of current account data and better explain historical episodes of current account imbalance in Pakistan.

Suggested Citation

  • 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.
  • Handle: RePEc:pid:journl:v:50:y:2011:i:4:p:401-421
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    References listed on IDEAS

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    More about this item

    Keywords

    Current Account; Present Value Models; Consumption-based Interest Rate; Pakistan;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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