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The Persistence of Current Account Balances and its Determinants : The Implications for Global Rebalancing

Author

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  • Erica Clower

    (Asian Development Bank Institute (ADBI))

  • Hiro Ito

Abstract

This paper examines the statistical nature of the persistency of current account balances and its determinants. With the assumption that stationary current account series ensures the long-run budget constraint while countries may experience “local non-stationarity†in current account balances, we examine the dynamics of current account balances across a panel of 70 countries. We find that once we allow current account series to take regime shifts by applying a Markovswitching (MS) process, we are able not only to reject the unit root null hypothesis for a much increased number of countries than with standard linear unit root tests, but also to identify notable cross-country differences in the timing and duration of stationary and locally nonstationary regimes. Armed with the structural break dates the MS-ADF testing provides, we investigate the determinants of the different degrees of current account persistence. We find that emerging market countries with fixed exchange rate regime or countries with greater financial openness are more likely to enter a random walk regime, which is more evident among countries with current account deficits. For countries with all levels of income, trade openness decreases the likelihood of entering the random walk regime, presumably reducing the cost of current account adjustments. Also, countries with budget deficits tend to stay in stationary regimes, so do those with current account deficits, implying that markets force these countries to rebalance their current account imbalances. When we examine the determinants of various degrees of current account persistence, the type of exchange rate regimes no longer affects the extent of current account persistence. However, countries with greater trade or financial openness, or those with mounting pressure from real exchange rate misalignment tend to have a smaller degree of current account persistence while international reserves holding seems to contribute to a larger degree of persistence.

Suggested Citation

  • Erica Clower & Hiro Ito, 2012. "The Persistence of Current Account Balances and its Determinants : The Implications for Global Rebalancing," Macroeconomics Working Papers 23381, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:macroe:23381
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    References listed on IDEAS

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    1. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-154, March-Apr.
    2. Nelson, Charles R & Piger, Jeremy & Zivot, Eric, 2001. "Markov Regime Switching and Unit-Root Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 404-415, October.
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    Cited by:

    1. Eguren Martin, Fernando, 2016. "Exchange rate regimes and current account adjustment: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 69-93.
    2. Agnieszka Gehringer, 2015. "New evidence on the determinants of current accounts in the EU," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(4), pages 769-793, November.
    3. Adnan Velic, 2017. "Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability," Trinity Economics Papers tep1417, Trinity College Dublin, Department of Economics.
    4. Christophe André & Tsangyao Chang & Luis A. Gil-Alana & Rangan Gupta, 2017. "Current Account Sustainability in G7 and BRICS: Evidence from a Long Memory Model with Structural Breaks," Working Papers 201705, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Current Account Balances; Global rebalancing; financial openness; real exchange rate misalignment;

    JEL classification:

    • 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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