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Current account and relative prices: Are there any cointegration relationships in the presence of structural breaks in emerging economies?

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  • Idil Uz
  • Natalya Ketenci

Abstract

The aim of this study is to examine the long-run relationship between the current account and relative prices, such as terms of trade (TOT) and real exchange rate, for the emerging economies. These variables have been exposed to large fluctuations for more than two decades in all emerging economies; therefore, structural breaks have to be taken into account in all estimations. In this article, various methodological techniques have been used to examine this long-run relationship (with and without the structural breaks). Two important results have emerged, first; when the structural changes are excluded there is a strong evidence for long-run relationship between current account and relative prices. Second; when the structural breaks are included, variables are found to be stationary. Hence, depending on the stability of the variables, the validity of the cointegration relationship has been seriously questioned. This study illustrates that the test results proving non-stationary of the series and the presence of cointegration may be spurious if there is any possibility of instability.

Suggested Citation

  • Idil Uz & Natalya Ketenci, 2013. "Current account and relative prices: Are there any cointegration relationships in the presence of structural breaks in emerging economies?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 22(4), pages 536-561, June.
    • Handle: RePEc:taf:jitecd:v:22:y:2013:i:4:p:536-561
    DOI: 10.1080/09638199.2011.573082
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    1. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2004. "Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective," Working Paper Series 353, European Central Bank.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
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    Cited by:

    1. Natalya Ketenci & Idil Uz Akdogan & Hatice Kerra Geldi, 2014. "Determinants Of The Current Account In The Eu And Piigs," Journal Articles, Center For Economic Analyses, pages 5-14, December.

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