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Dynamics of Current Account Deficit: A Lesson from Pakistan

  • Syed tehseen, jawaid
  • Raza, Syed Ali

This study investigates the determinants of current account deficit in Pakistan by using the annual time series data for the period 1976 to 2010. The cointegration results suggest the positive and significant long run relationship of current account deficit with exchange rate, trade deficit and fiscal deficit, while significant negative relationship is found with external debt and private saving. The error correction model also confirms the significant positive relationship of current account deficit with exchange rate, trade deficit and fiscal deficit in short run. The Granger-causality test shows the bidirectional causality run from exchange rate and external debt to current account deficit. However, unidirectional causality is found from current account deficit to external debt and fiscal deficit. It is recommended that government needs to be cautious in financing its fiscal deficit. Savings habits should be increase to narrow the investment gap in economy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38999.

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Date of creation: 10 Feb 2012
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Handle: RePEc:pra:mprapa:38999
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  1. Hanan Morsy, 2009. "Current Account Determinants for Oil-Exporting Countries," IMF Working Papers 09/28, International Monetary Fund.
  2. Calderon, Cesar & Chong, Alberto & Loayza, Norman, 2000. "Determinants of current account deficits in developing countries," Policy Research Working Paper Series 2398, The World Bank.
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. 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.
  5. Kwalingana, Samson & Nkuna, Onelie, 2009. "The Determinants of Current Account Imbalances in Malawi," MPRA Paper 14694, University Library of Munich, Germany.
  6. Hamid Faruqee & Guy Debelle, 1996. "What Determines the Current Account? a Cross-Sectional and Panel Approach," IMF Working Papers 96/58, International Monetary Fund.
  7. Ahmad Zubaidi Baharumshah & Evan Lau, 2007. "Dynamics of fiscal and current account deficits in Thailand: an empirical investigation," Journal of Economic Studies, Emerald Group Publishing, vol. 34(6), pages 454-475, November.
  8. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
  9. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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