Current account sustainability and capital mobility in Latin American and Caribbean countries

This study examines two issues, namely, the degree of current account deficit (CAD) sustainability and the degree of capital mobility in 24 Latin American and Caribbean countries and three regional agreements: Andean Community, MERCOSUR and SICA. To this end, the paper investigates the long-run relationship between saving and investment along with short-run dynamics by applying common correlated effects mean group (CCEMG) estimator to a panel error-correction model. Findings indicate that CAD is weakly sustainable in the Latin American and Caribbean region, MERCOSUR, and SICA while it’s strongly unsustainable in the Andean Community. The sub-period analysis reveals that CAD has been adversely affected by the 2008 crisis. However, in the post-crisis period, CAD has been slowly decreasing in the Latin American and Caribbean region and Andean Community whereas it has continued increasing in MERCOSUR and SICA. Further, the estimates of error-correction terms and short-run coefficients indicate that the Andean Community and MERCOSUR observe higher degree of long-run and short-run capital mobility than SICA. Finally, the study provides policy implications.