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Accounting for U.S. Current Account Deficits: An Empirical Investigation

  • Selahattin Dibooglu

    (Southern Illinois University at Carbondale)

This paper investigates the relationship between the U.S. current account deficit and a number of macroeconomic variables including government spending, budget balance, productivity, domestic and foreign income, real interest rates, and terms of trade. Implications of the conventional "twin deficit" and the dynamic optimizing approaches are tested using a Vector Error Correction Model. Innovation accounting results indicate that macroeconomic variables explain the current account reasonably well, and the evidence seems to support the conventional approach where budget deficits and increases in the real interest rates are associated with curent account deficits.

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Paper provided by EconWPA in its series International Finance with number 9502003.

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Date of creation: 22 Feb 1995
Date of revision:
Handle: RePEc:wpa:wuwpif:9502003
Note: The paper is a binary WordPerfect 5.1 file submitted via FTP. The document was prepared on a 486 IBM-compatible for printing on a LaserJet 4M. The author reports that the figures are not with the paper. Readers interested in receiving the figures should e-mail the author - sdibo at . This paper was presented at the 64th Annual Conference of the
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  1. Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993. "Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 580-94, October.
  2. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
  3. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
  4. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
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  6. HARJIT K. Arora & PAMI Dua, 1993. "Budget Deficits, Domestic Investment, And Trade Deficits," Contemporary Economic Policy, Western Economic Association International, vol. 11(1), pages 29-44, 01.
  7. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
  8. William G. Dewald & Michael Ulan, 1990. "The Twin-Deficit Illusion," Cato Journal, Cato Journal, Cato Institute, vol. 9(3), pages 689-707, Winter.
  9. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  10. repec:tpr:qjecon:v:97:y:1982:i:2:p:251-70 is not listed on IDEAS
  11. 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.
  12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  13. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
  14. Dahlberg, M. & Jansson, P., 1993. "On the Autoregressive Correction of the Augmented Dickey- Fuller Test," Papers 1993-16, Uppsala - Working Paper Series.
  15. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  16. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  17. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  18. Stephen M. Miller & Frank S. Russek, 1989. "Are The Twin Deficits Really Related?," Contemporary Economic Policy, Western Economic Association International, vol. 7(4), pages 91-115, October.
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