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Current Account Balances and Output Volatility

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  • Ceyhun Elgin
  • Tolga Umut Kuzubas

Abstract

In this paper, we examine the empirical relationship between current account balance and output volatility in a panel data framework using annual data from 185 countries over the period from 1950 to 2010. In our static panel data analysis, we find that a larger current account deficit is associated with higher output volatility, particularly for emerging market economies. Our analysis reveals that this association strongly interacts with GDP per-capita. In order to account for possible endogeneity and feedback effects, we also employ a Panel-VAR framework and show that output volatility gives a significant positive response to a shock in the current account balance and a negative response to the shocks on GDP per-capita capita.
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Suggested Citation

  • Ceyhun Elgin & Tolga Umut Kuzubas, 2013. "Current Account Balances and Output Volatility," Working Papers 2013/04, Bogazici University, Department of Economics.
    • Handle: RePEc:bou:wpaper:2013/04
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    References listed on IDEAS

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    1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
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    5. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    6. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    7. Michał Brzozowski & Sadananda Prusty, 2013. "Impact of GDP volatility on current account balances," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 5(3), pages 239-252.
    8. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
    9. Mr. Peter Isard & Mr. Hamid Faruqee, 1998. "Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach," IMF Occasional Papers 1998/012, International Monetary Fund.
    10. Lane, Philip & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Tiryaki, S. Tolga, 2014. "Sectoral asymmetries in a small open economy," Economic Modelling, Elsevier, vol. 43(C), pages 465-475.
    2. Jalles, João Tovar & Karras, Georgios, 2023. "Macroeconomic volatility and the current account: Extending the evidence," Economic Modelling, Elsevier, vol. 125(C).

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    More about this item

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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