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Can an Inter-temporal Model Explain India's Current Account Balance?

  • Khundrakpam, J. K.
  • Ranjan, Rajiv

Employing an inter-temporal model on a constructed private consumption series, the paper finds that the current account balance in India during 1950-51 to 2005-06 is intertemporally solvent. This is primarily a reflection of the developments that have taken place during the post-reform period, when restrictions on capital flows have been significantly liberalised. We do find some evidence of asymmetry between capital flows, which is on expected lines as restrictions on capital outflows from India are more than those on inflows to India. The study finds that the optimal current account balance has been larger than the actual current account balance. This is intuitively appealing as there were severe foreign exchange restrictions in the pre-reform period which restricted the smoothing of private consumption up to the optimal level. With further liberalisation of capital flows, both inflows and outflows, it would be possible for agents to further smoothen their consumption to desired optimal level, allowing scope for higher current account deficit to attain potentially higher growth.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50928.

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Date of creation: Mar 2008
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Publication status: Published in Reserve Bank of India Occasional Papers No. 1, Summer 2008.29(2008): pp. 1-17
Handle: RePEc:pra:mprapa:50928
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  1. Agenor, Pierre-Richard & Bismut, Claude & Cashin, Paul & McDermott, C. John, 1999. "Consumption smoothing and the current account: evidence for France, 1970-1996," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 1-12, January.
  2. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
  3. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
  4. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Wiley Blackwell, vol. 31(59), pages 369-84, December.
  5. Kim Kunhong & Hall Viv & Buckle Robert, . "New Zealand's Current Account Deficit: Analysis based on the Intertemporal Optimisation Approach," EcoMod2002 330800040, EcoMod.
  6. Glenn Otto, 2003. "Can an Intertemporal Model Explain Australia's Current Account Deficit?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(3), pages 350-359.
  7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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