Determinants of Current Account Deficit in Developing Countries: The Case of Bangladesh
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Published
Mar 1, 2006
Abstract
Co-integration and Error Correction Model (ECM) are employed to study the behavior of Current Account Deficit (CAD) of Bangladesh and its determinants. The determinants of CAD include budget surplus, domestic saving, domestic income growth, foreign income growth, foreign interest rate, terms of trade, export and real exchange rate. A long-run equilibrium (co-integration) relationship is found between CAD and its determinants, although some variables are non-stationary. Out of eight independent variables only three of them namely, terms of trade, export and foreign interest rate, are found to have significant impact on CAD both in the long and short run. ECM formulation of the CAD model shows that more than 72% discrepancy between actual and long-run value of CAD is corrected in each year. The important implication of the study is that domestic economic policy has little to do with correcting CAD as all significant factors are related to the external economic conditions.
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Keywords
Developing Country
References
• Bangladesh Bank, Statistics Department, Annual Export Receipts, different years.
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• Calderón, Cesar; Alberto Chong and Norman Loyza (1999). “Determinants of Current Account Deficit in Developing Countries”. World Bank working paper no.2398.
• Chinn, Menzie and Eswar S. Prasad (2000). “Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration”. NBER Working Paper No. 7581.
• Carigwell, C. Ronald and Sudesh Samaroo (1997). “Dynamic Modeling of the Current Accounts: Evidence from the Caribbean”. International Economic Journal , vol.11, no.4, pp.39-50.
• Debelle, Guy and Hamid Faruqee (1996). “What Determines the Current Account? A Cross-Sectional and Panel Approach”. IMF Working Paper, No.58.
• Engle, R.F. and C.W.J. Granger (1987). “Co-integration and Error Correction: Representation, Estimation and Testing”. Econometrica, vol.55, pp.251-276.
• Eusufzai, Zaki (2000), “Liberalization in the Shadow of a Large Neighbour- A Case Study of Bangladesh-India Economic Relations”, Centre for Policy Dialogue (CPD) and University Press Limited (UPL): Dhaka.
• Frenkel, Jacob, Assaf Razin and Chi-WaYuen (1996). “Fiscal Policies and Growth in the World Economy”. Cambridge, MA: MIT.
• Glick, Reuven and Kenneth Rogoff (1995). “Global versus Country-Specific Productivity Shocks and the Current Account”. Journal of Monetary Economics, Vol.35, pp.159-192.
• Green, H. William (2003). “Econometric Analysis”, (5th ed), Pearson Education (Singapore) Pte. Ltd., India, p.649.
• Greenwood, Jeremy (1983). “Expectations, the exchange rate and the current account”. Journal of Monetary Economics, Vol. 12, pp.543-569.
• Gujarati, Damodar N. (1995). Basic Econometrics, (3rd ed). McGraw-Hill, Inc.: India.
• Hassan, A.F.M. Kamrul; Ali, Md. Ashraf and Islam, Dr. M. Rafiqul (2003) Trade Liberalization in Bangladesh-A Critical Evaluation, The Cost and Management, Vol. XXXI, No.3, pp. 25-29.
• Islam, Nurul (2004), “Looking Outward – Bangladesh in the World Economy”, The University Press Limited (UPL): Dhaka.
• Khan, Md. Asaduzzaman (1994) “Foreign Trade of Bangladesh: Problems and Prospects”, Bank Parikrama , Vol. XIX, Nos. 1 & 2, pp.48-58.
• Khan, Syed Ahmed (2001) “An Overview of External Sector of Bangladesh: From Inwardness to Openness”. Bank Parikrama , Vol. XXVI, Nos. 3 & 4, pp.56-74.
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• Krugman R. Paul and Maurice Obstfeld (2003). “International Economics-Theory and Policy”, (6th ed), Pearson Education (Singapore) Pte. Ltd., India , p.533.
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• Mansoorian, Arman (1998). “Habits and Durability in Consumption, and the Dynamics of the Current Account”. Journal of International Economics, vol.44, pp.69-82.
• Mendoza, Enrique (1991). “Capital Controls and Gains from Trade in a Business Cycle Model of a Small Open Economy”. IMF Staff Paper No. 38
• Mendoza, Enrique (1995). “The Terms of Trade, the Real Exchange Rate and Economic Fluctuations”. International Economic Review, No. 36, pp.101-137.
• Newey, W. and West, K. (1987). “A Simple, Positive Semi-definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix”. Econometrica, Vol.55, pp. 703-708.
• Obstfeld, Maurice and Kenneth Rogoff (1982). “Aggregate Spending and the Terms of Trade: Is There a Laursen-Herberger-Metzler Effect?”, Quarterly Journal of Economics, vol.97, pp.251-270.
• Phillips, P.C.B. and P. Peron (1988). “Testing for a Unit Root in Time Series Regression”. Biometrika, Vol.75, 335-346.
• Rahim, A.M.A. and Muhammad Taheruddin (1975). “An Analysis of Balance of Payments of Bangladesh”. Bangladesh Bank Bulletin, January.
• Rahman, Mustafizur (1991), “External Sector in the Economy of Bangladesh: A Brief Review of Performance and Policies in the 1980s” in Rahman Sobhan (ed.) The Decade of Stagnation- The State of the Bangladesh Economy in the 1980’s, University Press Limited (UPL): Dhaka, pp.30-47.
• Rahman, Mustafizur (2003), “Emerging Concerns in Bangladesh’s External Sector in FY2002: A Wakw-up Call”, in”A Review of Bangladesh’s Development 2002, pp.35-62, Centre for Policy Dialogue (CPD) and University Press Limited (UPL): Dhaka.
• Ray, Ajit Kumar and Md. Nasarul Karim (2001), “Export-Led Growth: An Evaluation of Export Credit Guarantee Scheme as a Tool of Export Promotion in Bangladesh”, Bank Parikrama , Vol.XXVI, Nos. 3&4, pp.90-117.
• Razin, Assaf (1995). “The Dynamic-Optimizing Approach to Current Account: Theory and Evidence”. In P. Kenen (ed) Understanding Interdependence: The Macro-economics of the Open Economy, NJ: Princeton.
• Reisen, Helmut (1982). “Sustainable and Excessive Current Account Deficit”. OECD Technical Paper No. 132.
• Reza, Sadrel, A.H.M.M. Alam and M. Ali Rashid (1986). “The Balance of Payments Effects of Private Foreign Investment: A Case Study of Bangladesh”. The Bangladesh Development Studies, vol. XIV, no.3, pp.55-66.
• Sargan, J.D. (1984). “Wages and Prices in the United Kingdom: A Study in Econometric Methodology”, in K.F. Wallis and D.F. Hendry (eds.) Quantitative Economics and Econometric Analysis, Basil Blackwell, Oxford.
• Sarisoy-Guerin, Selen (2003). “The Relationship between Capital Flows and Current Account: Volatility and Causality”, www.econ.kuleuven.ac.be/smye/abstracts/p469.pdf
• Shahabuddin, Quazi, Narayan Chandra Nath, Salma Choudhury Zohir and Dilip Kumar Roy (2004). “Trade and Foreign Direct Investment Performance during policy Reform in Bangladesh” in Omar Haider Chowdhury and Willem van der Geest (eds)”Economic Reform and Trade Performance in South Asia, pp.30-128, Dhaka: BIDS and UPL.
• Stockman, Alan (1987). “The Equilibrium Approach to Exchange Rates”. Economic Review, Federal Reserve Bank of Richmond, March-April: 12-31.
• Svensson, Lars and Assaf Razin (1983). “The Terms of Trade and Current Account: The Herberger-Laursen-Metzler Effect”. Journal of Political Economy, vol.91, pp.97-125.
• Taheruddin, Muhammad (1978). “Balance of Payments Problem of Bangladesh”. Bank Parikrama , vol.III, no. 3&4, pp.44-53.
• Tornel,Aaron and Phillip Lane (1998). “Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account”. Journal of International Economics , vol.44, pp.83-112.
• Bannaga, A. Alamedin (2004). “Adjustment Policies and The Current Account Balance: Empirical Evidence from Sudan”. Development Economics and Public Policy Working Paper Series, No.8, University of Manchester, UK
• Calderón, Cesar; Alberto Chong and Norman Loyza (1999). “Determinants of Current Account Deficit in Developing Countries”. World Bank working paper no.2398.
• Chinn, Menzie and Eswar S. Prasad (2000). “Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration”. NBER Working Paper No. 7581.
• Carigwell, C. Ronald and Sudesh Samaroo (1997). “Dynamic Modeling of the Current Accounts: Evidence from the Caribbean”. International Economic Journal , vol.11, no.4, pp.39-50.
• Debelle, Guy and Hamid Faruqee (1996). “What Determines the Current Account? A Cross-Sectional and Panel Approach”. IMF Working Paper, No.58.
• Engle, R.F. and C.W.J. Granger (1987). “Co-integration and Error Correction: Representation, Estimation and Testing”. Econometrica, vol.55, pp.251-276.
• Eusufzai, Zaki (2000), “Liberalization in the Shadow of a Large Neighbour- A Case Study of Bangladesh-India Economic Relations”, Centre for Policy Dialogue (CPD) and University Press Limited (UPL): Dhaka.
• Frenkel, Jacob, Assaf Razin and Chi-WaYuen (1996). “Fiscal Policies and Growth in the World Economy”. Cambridge, MA: MIT.
• Glick, Reuven and Kenneth Rogoff (1995). “Global versus Country-Specific Productivity Shocks and the Current Account”. Journal of Monetary Economics, Vol.35, pp.159-192.
• Green, H. William (2003). “Econometric Analysis”, (5th ed), Pearson Education (Singapore) Pte. Ltd., India, p.649.
• Greenwood, Jeremy (1983). “Expectations, the exchange rate and the current account”. Journal of Monetary Economics, Vol. 12, pp.543-569.
• Gujarati, Damodar N. (1995). Basic Econometrics, (3rd ed). McGraw-Hill, Inc.: India.
• Hassan, A.F.M. Kamrul; Ali, Md. Ashraf and Islam, Dr. M. Rafiqul (2003) Trade Liberalization in Bangladesh-A Critical Evaluation, The Cost and Management, Vol. XXXI, No.3, pp. 25-29.
• Islam, Nurul (2004), “Looking Outward – Bangladesh in the World Economy”, The University Press Limited (UPL): Dhaka.
• Khan, Md. Asaduzzaman (1994) “Foreign Trade of Bangladesh: Problems and Prospects”, Bank Parikrama , Vol. XIX, Nos. 1 & 2, pp.48-58.
• Khan, Syed Ahmed (2001) “An Overview of External Sector of Bangladesh: From Inwardness to Openness”. Bank Parikrama , Vol. XXVI, Nos. 3 & 4, pp.56-74.
• Knight, M. and F. Scacciavillani (1998). “Current Account: What is Their Relevance for Economic Policy Making?”. IMF Working Paper, No.71.
• Krugman R. Paul and Maurice Obstfeld (2003). “International Economics-Theory and Policy”, (6th ed), Pearson Education (Singapore) Pte. Ltd., India , p.533.
• Leiderman, Leonardo and Assaf Razin (1991). “Determinants of External Imbalances: The Role of Taxes, Government Spending and Productivity”. Journal of the Japanese and International Economies, vol.5, pp.421-450.
• Mansoorian, Arman (1998). “Habits and Durability in Consumption, and the Dynamics of the Current Account”. Journal of International Economics, vol.44, pp.69-82.
• Mendoza, Enrique (1991). “Capital Controls and Gains from Trade in a Business Cycle Model of a Small Open Economy”. IMF Staff Paper No. 38
• Mendoza, Enrique (1995). “The Terms of Trade, the Real Exchange Rate and Economic Fluctuations”. International Economic Review, No. 36, pp.101-137.
• Newey, W. and West, K. (1987). “A Simple, Positive Semi-definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix”. Econometrica, Vol.55, pp. 703-708.
• Obstfeld, Maurice and Kenneth Rogoff (1982). “Aggregate Spending and the Terms of Trade: Is There a Laursen-Herberger-Metzler Effect?”, Quarterly Journal of Economics, vol.97, pp.251-270.
• Phillips, P.C.B. and P. Peron (1988). “Testing for a Unit Root in Time Series Regression”. Biometrika, Vol.75, 335-346.
• Rahim, A.M.A. and Muhammad Taheruddin (1975). “An Analysis of Balance of Payments of Bangladesh”. Bangladesh Bank Bulletin, January.
• Rahman, Mustafizur (1991), “External Sector in the Economy of Bangladesh: A Brief Review of Performance and Policies in the 1980s” in Rahman Sobhan (ed.) The Decade of Stagnation- The State of the Bangladesh Economy in the 1980’s, University Press Limited (UPL): Dhaka, pp.30-47.
• Rahman, Mustafizur (2003), “Emerging Concerns in Bangladesh’s External Sector in FY2002: A Wakw-up Call”, in”A Review of Bangladesh’s Development 2002, pp.35-62, Centre for Policy Dialogue (CPD) and University Press Limited (UPL): Dhaka.
• Ray, Ajit Kumar and Md. Nasarul Karim (2001), “Export-Led Growth: An Evaluation of Export Credit Guarantee Scheme as a Tool of Export Promotion in Bangladesh”, Bank Parikrama , Vol.XXVI, Nos. 3&4, pp.90-117.
• Razin, Assaf (1995). “The Dynamic-Optimizing Approach to Current Account: Theory and Evidence”. In P. Kenen (ed) Understanding Interdependence: The Macro-economics of the Open Economy, NJ: Princeton.
• Reisen, Helmut (1982). “Sustainable and Excessive Current Account Deficit”. OECD Technical Paper No. 132.
• Reza, Sadrel, A.H.M.M. Alam and M. Ali Rashid (1986). “The Balance of Payments Effects of Private Foreign Investment: A Case Study of Bangladesh”. The Bangladesh Development Studies, vol. XIV, no.3, pp.55-66.
• Sargan, J.D. (1984). “Wages and Prices in the United Kingdom: A Study in Econometric Methodology”, in K.F. Wallis and D.F. Hendry (eds.) Quantitative Economics and Econometric Analysis, Basil Blackwell, Oxford.
• Sarisoy-Guerin, Selen (2003). “The Relationship between Capital Flows and Current Account: Volatility and Causality”, www.econ.kuleuven.ac.be/smye/abstracts/p469.pdf
• Shahabuddin, Quazi, Narayan Chandra Nath, Salma Choudhury Zohir and Dilip Kumar Roy (2004). “Trade and Foreign Direct Investment Performance during policy Reform in Bangladesh” in Omar Haider Chowdhury and Willem van der Geest (eds)”Economic Reform and Trade Performance in South Asia, pp.30-128, Dhaka: BIDS and UPL.
• Stockman, Alan (1987). “The Equilibrium Approach to Exchange Rates”. Economic Review, Federal Reserve Bank of Richmond, March-April: 12-31.
• Svensson, Lars and Assaf Razin (1983). “The Terms of Trade and Current Account: The Herberger-Laursen-Metzler Effect”. Journal of Political Economy, vol.91, pp.97-125.
• Taheruddin, Muhammad (1978). “Balance of Payments Problem of Bangladesh”. Bank Parikrama , vol.III, no. 3&4, pp.44-53.
• Tornel,Aaron and Phillip Lane (1998). “Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account”. Journal of International Economics , vol.44, pp.83-112.
How to Cite
M., Kamrul Hassanm A. F. 2006. “Determinants of Current Account Deficit in Developing Countries: The Case of Bangladesh”. Studies in Business and Economics 12 (1). https://doi.org/10.29117/sbe.2006.0012.
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