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Current Account Balances and Output Volatility

  • Ceyhun Elgin
  • Tolga Umut Kuzubas

In this paper, we examine the empirical relationship between current account balance and output volatility in a panel data framework using annual data from 185 countries over the period from 1950 to 2010. In our static panel data analysis, we find that a larger current account deficit is associated with higher output volatility, particularly for emerging market economies. Our analysis reveals that this association strongly interacts with GDP per-capita. In order to account for possible endogeneity and feedback effects, we also employ a Panel-VAR framework and show that output volatility gives a significant positive response to a shock in the current account balance and a negative response to the shocks on GDP per-capita capita.

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File URL: http://www.econ.boun.edu.tr/public_html/RePEc/pdf/201304.pdf
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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2013/04.

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Date of creation: Apr 2013
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Handle: RePEc:bou:wpaper:2013/04
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  1. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  2. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
  3. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  4. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  5. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.
  6. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
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  8. Peter Isard & Hamid Faruqee, 1998. "Exchange Rate Assessment; Extension of the Macroeconomic Balance Approach," IMF Occasional Papers 167, International Monetary Fund.
  9. Michał Brzozowski & Sadananda Prusty, 2011. "Impact of GDP volatility on current account balances," Working Papers 2011-02, Faculty of Economic Sciences, University of Warsaw.
  10. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  11. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  12. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
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