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IMPACT OF CURRENT ACCOUNT GAPS ON INFLATION IN SOUTH ASIAN COUNTRIES
Corresponding Author(s) : Sardar Shakeel Ahmad
Humanities & Social Sciences Reviews,
Vol. 9 No. 3 (2021): May
Abstract
Purpose of the study: The current study estimated the impact of current account gaps (CAGAP) on inflation in South Asian countries, namely, Pakistan, Bangladesh, India, Nepal, and Sri Lanka.
Methodology: CAGAP is estimated through macroeconomic fundamentals by applying panel time series data methodology from 1990 to 2018. We adopted the bias-corrected least square dummy variable (LSDVC) estimation technique for the time series macro and dynamic panel to find the impact of CAGAP on inflation.
Principal findings: CAGAP negatively affected consumer price inflation rate while Lag of inflation, trade openness, age dependency, and oil prices positively affected inflation rate in the selected sample countries. In LSDVC, the Blundell and Bond (BB), Arellano-Bond (AB), Anderson and Hsiao (AH) estimates are determined while system and difference GMM estimates also confirmed the results. Therefore, LSDVC-AB is selected from the three versions of LSDVC as baseline regression based on higher significance and lower standard error.
Applications of the Study: CAGAP affects inflation, so it should be estimated annually in all these countries for macroeconomic stability as IMF annually estimates for developed countries in an external sector report. It is worthwhile to estimate CAN regularly and watch it for CAB evaluation and future Adjustment. Based on the results, the study recommends that tailored policies and interventions focus on the structural distortions and slow-changing factors to eradicate CAGAP.
Novelty/ Originality of the Study: A few empirical studies have scrutinized the role of CAB on macroeconomic variables. No empirical study on CAGAP and its consequences are available in the selected region's existing literature to the best of our knowledge.
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- Ahmad S. S., Jaffri A. A., Khan A., & Rana F. (2021). Impact of Current Account Gap on Economic Growth in South Asian Countries, International Journal of Management (IJM), 12(4), 297-303.
- Al-Eyd, A., Barrell, R., & Pomerantz, O. (2005). Correcting US Imbalances. National Institute Economic Review, 192(1), 33–39. https://doi.org/10.1177/002795010519200104 DOI: https://doi.org/10.1177/002795010519200104
- Baltagi B. H. (2008). Econometric analysis of panel data. Chichester, UK: John Wiley & Sons.
- Blundell, R. and Bond, S. . (2000). GMM estimation with persistent panel data: an application to production functions. Econometric Reviews, 19, 321– 340. https://doi.org/10.1080/07474930008800475 DOI: https://doi.org/10.1080/07474930008800475
- Borensztein E., Gregorio D.J. (1999). Devaluation and Inflation After Currency Crisis ,International Monetary Fund Universidad de Chile.
- Bruno, G.S.F. (2005). Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals. The Stata Journal 5(4), 473-500. https://doi.org/10.1177/1536867X0500500401 DOI: https://doi.org/10.1177/1536867X0500500401
- Comunale M. (2015). Current Account and REER misalignments in Central Eastern EU Countries: an update using the Macroeconomic Balance approach. Economics Department, Bank of Lithuania. https://doi.org/10.2139/ssrn.2683310 DOI: https://doi.org/10.2139/ssrn.2683310
- Comunale M. . (2017). A panel VAR analysis of macro-financial imbalances in the EU. ECB Working Paper, No. 2026, ISBN 978-92-899-2748-2.
- Cusolito , A. P., & Nedeljkovic, M. (2013). Toolkit For The Analysis Of Current Account Imbalances. World Bank.
- Dinner, N, & Kandil, M. . (2011). The Effects of Exchange Rate Fluctuations on Exports: A Sectoral Analysis for Turkey. Journal of International Trade and Economic Development, 20(6). https://doi.org/10.1080 /09638190903137214 DOI: https://doi.org/10.1080/09638190903137214
- Duarte P. & Schnabl G. . (2014). Macroeconomic Policy Making, Exchange Rate Adjustment and Current Account Imbalances in Emerging Markets, CESifo Working Paper, No. 5064, Center for Economic Studies and Ifo Institute (CESifo), Munich.
- Fuchs p. (2015). Current Account Imbalances: Signs of Adjustment? Review, Federal Reserve Bank of St. Louis, 4(5), 119-128.
- Gnimassoun, D., & Mignon, B. . (2013). Current-account adjustments and exchange-rate misalignments. Working Paper 2013/29, CEPII Research Center.
- Greene E.J. (2018). Macroeconomic Analysis and Policy: A Systematic Approach 2018. Singapore: World Scientific Publishing Co Pte Ltd. https://doi.org/10.1142/10542 DOI: https://doi.org/10.1142/10542
- Holinski N., Kool M.J.C. & Muysken J., . (2012). Persistent macroeconomic imbalances in the Euro area: causes and consequences. Review, Federal Reserve Bank of St. Louis, 94, 1-20. https://doi.org/10.20955/r.94.1-20 DOI: https://doi.org/10.20955/r.94.1-20
- Jaffri A.A. (2010). Exchange Rate Pass-through to Consumer Prices in Pakistan: Does Misalignment Matter? The Pakistan Development Review, 49(1), 19-35. https://doi.org/10.30541/v49i1pp.19-35 DOI: https://doi.org/10.30541/v49i1pp.19-35
- Jha, R., & Afrin, S. . (2018). Structural Transformation in South Asia. ASARC Working Paper 2018/01. https://doi.org/10.2139/ssrn.3134242 DOI: https://doi.org/10.2139/ssrn.3134242
- Judson A.R., & Owen L.A. . (1999). Estimating dynamic panel data models: a guide for q macroeconomists. Economics Letters, 65, 9-15. https://doi.org/10.1016/S0165-1765(99)00130-5 DOI: https://doi.org/10.1016/S0165-1765(99)00130-5
- Kamin B.S. (1997). A Multi-country Comparison of the Linkages between Inflation and Exchange Rate Competitiveness. Bank for International Settlement,Monetary and Economics department (BASLE,WP No.45). https://doi.org/10.2139/ssrn.860684 DOI: https://doi.org/10.2139/ssrn.860684
- Khan Z. S., Islam S. (2013). The Effects of Remittances on Inflation: Evidence from Bangladesh. Journal of Economics & Business Research, 19(2), 198-208.
- Klau, & Marc. (1998). Exchange Rate Regime and Inflation and Output in Sub-Saharan Countries. Bank for International Settlements, Monetary and Economic Department (BASLE, WP No. 53). https://doi.org/10.213 9/ssrn.857006 DOI: https://doi.org/10.2139/ssrn.857006
- Khan, K. M., Khan, A. M., Ullah M., Usman, A., Farhat, S., (2020). Closing price determination; extent of manipulation and deterrent strategy formulation: a case of Pakistan Stock Exchange. Journal of Critical Reviews, 7(14), 2689-2705.
- Lane P.R. & Milesi-Ferretti M. . (2012). External Adjustment and the Global Crisis. . Journal of International Economics, 88(2), 252-265. https://doi.org/10.1016/j.jinteco.2011.12.013 DOI: https://doi.org/10.1016/j.jinteco.2011.12.013
- Lane R.P., and Milesi-Ferretti M.G. . (2014). Global Imbalances and External Adjustment after the Crisis 2014. IMF Working Paper Research Department WP/14/151. https://doi.org/10.5089/9781498339216.001 DOI: https://doi.org/10.5089/9781498339216.001
- Medina L., Prat, & Thomas J. (2010). Current Account Balance Estimates for Emerging Market Economies. International Monetary Fund, IMF WP/10/43. https://doi.org/10.5089/9781451962994.001 DOI: https://doi.org/10.5089/9781451962994.001
- Obstfeld, M., & Rogoff, K. S. (2005). Global Current Account Imbalances and Exchange Rate Adjustments. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 36(1), 67-146. https://doi.org/10.1353/eca.2005.0020 DOI: https://doi.org/10.1353/eca.2005.0020
- Pyhrr S., Born W., and Webb J. (1990). Development of a Dynamic Investment Strategy under Alternative Inflation Cycle Scenarios. Journal of Real Estate Research, 5(2), 177-193. https://doi.org/10.1080/10 835547.1990.12090617 DOI: https://doi.org/10.1080/10835547.1990.12090617
- Rahman, J. (2008). Current Account Developments in the New Member States of the European Union: Equilibrium, Excess and EU-Phoria. . IMF Working Paper WP/08/92, International Monetary Fund. https://doi.org/10.5089/9781451869538.001 DOI: https://doi.org/10.5089/9781451869538.001
- Sbordone A. M. (2007). Inflation persistence: Alternative interpretations and policy implications. Journal of Monetary Economics, Elsevier, 54(5), 1311-1339. https://doi.org/10.1016/j.jmoneco.2007.06.007 DOI: https://doi.org/10.1016/j.jmoneco.2007.06.007
- Serven L. & Nguyen H., . (2013). Global Imbalances: Origins and Prospects. World Bank Research Observer, World Bank Group, 28(2), 191-219. https://doi.org/10.1093/wbro/lkt002 DOI: https://doi.org/10.1093/wbro/lkt002
- Shaikh, S., Channar, P., Shaikh, M., &, Ullah, M., (2021). Financial constraints and listed sugar mills on Pakistan Stock Exchange. International Journal of Management, 12(3), 70-76. https://doi.org/10.2927 0/JBS.12.2(2018).0118
- Sung, B. & Park, S.-D. (2018). Who Drives the Transition to a Renewable-Energy Economy? Multi-Actor Perspective on Social Innovation. Sustainability MDPI, 10, 448. DOI: https://doi.org/10.3390/su10020448
- Trabelsi E. (2016). What effects exert Economic Globalization and Central Bank Transparency on inflation of OECD countries? An Application of LSDVC Estimator on a Dynamic Panel Model. Working Papers hal-01157387, HAL. https://doi.org/10.3390/su10020448 DOI: https://doi.org/10.3390/su10020448
- Tung T. L., Ly M.T.P., Nhu Q.T.P, Thanh T. P., Anh. (2015). The Impact of Remittance Inflows on Inflation: Evidence in Asian and the Pacific Developing Countries. Journal of Applied Economic Sciences (JAES), 37, 1076-1080.
- Ullah, M., Shaikh, M., Channar, P., & Shaikh, S., (2021). Financial forecasting: an individual perspective. International Journal of Management, 12(3), 60-69.
- World Bank. (2019). South Asia Economic Focus, Fall 2019 - Globalization Backlash. Washington DC: The World Bank.
- Yurdakul, F., & Ucar, B. . (2015). The Relationship Between Current Deficit and Economic Growth: An Empirical Study on Turkey. Science Direct Procedia Economics and Finance 26, 101-108. https://doi.org/10 .1016/S2212-5671(15)00885-0 DOI: https://doi.org/10.1016/S2212-5671(15)00885-0
References
Ahmad S. S., Jaffri A. A., Khan A., & Rana F. (2021). Impact of Current Account Gap on Economic Growth in South Asian Countries, International Journal of Management (IJM), 12(4), 297-303.
Al-Eyd, A., Barrell, R., & Pomerantz, O. (2005). Correcting US Imbalances. National Institute Economic Review, 192(1), 33–39. https://doi.org/10.1177/002795010519200104 DOI: https://doi.org/10.1177/002795010519200104
Baltagi B. H. (2008). Econometric analysis of panel data. Chichester, UK: John Wiley & Sons.
Blundell, R. and Bond, S. . (2000). GMM estimation with persistent panel data: an application to production functions. Econometric Reviews, 19, 321– 340. https://doi.org/10.1080/07474930008800475 DOI: https://doi.org/10.1080/07474930008800475
Borensztein E., Gregorio D.J. (1999). Devaluation and Inflation After Currency Crisis ,International Monetary Fund Universidad de Chile.
Bruno, G.S.F. (2005). Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals. The Stata Journal 5(4), 473-500. https://doi.org/10.1177/1536867X0500500401 DOI: https://doi.org/10.1177/1536867X0500500401
Comunale M. (2015). Current Account and REER misalignments in Central Eastern EU Countries: an update using the Macroeconomic Balance approach. Economics Department, Bank of Lithuania. https://doi.org/10.2139/ssrn.2683310 DOI: https://doi.org/10.2139/ssrn.2683310
Comunale M. . (2017). A panel VAR analysis of macro-financial imbalances in the EU. ECB Working Paper, No. 2026, ISBN 978-92-899-2748-2.
Cusolito , A. P., & Nedeljkovic, M. (2013). Toolkit For The Analysis Of Current Account Imbalances. World Bank.
Dinner, N, & Kandil, M. . (2011). The Effects of Exchange Rate Fluctuations on Exports: A Sectoral Analysis for Turkey. Journal of International Trade and Economic Development, 20(6). https://doi.org/10.1080 /09638190903137214 DOI: https://doi.org/10.1080/09638190903137214
Duarte P. & Schnabl G. . (2014). Macroeconomic Policy Making, Exchange Rate Adjustment and Current Account Imbalances in Emerging Markets, CESifo Working Paper, No. 5064, Center for Economic Studies and Ifo Institute (CESifo), Munich.
Fuchs p. (2015). Current Account Imbalances: Signs of Adjustment? Review, Federal Reserve Bank of St. Louis, 4(5), 119-128.
Gnimassoun, D., & Mignon, B. . (2013). Current-account adjustments and exchange-rate misalignments. Working Paper 2013/29, CEPII Research Center.
Greene E.J. (2018). Macroeconomic Analysis and Policy: A Systematic Approach 2018. Singapore: World Scientific Publishing Co Pte Ltd. https://doi.org/10.1142/10542 DOI: https://doi.org/10.1142/10542
Holinski N., Kool M.J.C. & Muysken J., . (2012). Persistent macroeconomic imbalances in the Euro area: causes and consequences. Review, Federal Reserve Bank of St. Louis, 94, 1-20. https://doi.org/10.20955/r.94.1-20 DOI: https://doi.org/10.20955/r.94.1-20
Jaffri A.A. (2010). Exchange Rate Pass-through to Consumer Prices in Pakistan: Does Misalignment Matter? The Pakistan Development Review, 49(1), 19-35. https://doi.org/10.30541/v49i1pp.19-35 DOI: https://doi.org/10.30541/v49i1pp.19-35
Jha, R., & Afrin, S. . (2018). Structural Transformation in South Asia. ASARC Working Paper 2018/01. https://doi.org/10.2139/ssrn.3134242 DOI: https://doi.org/10.2139/ssrn.3134242
Judson A.R., & Owen L.A. . (1999). Estimating dynamic panel data models: a guide for q macroeconomists. Economics Letters, 65, 9-15. https://doi.org/10.1016/S0165-1765(99)00130-5 DOI: https://doi.org/10.1016/S0165-1765(99)00130-5
Kamin B.S. (1997). A Multi-country Comparison of the Linkages between Inflation and Exchange Rate Competitiveness. Bank for International Settlement,Monetary and Economics department (BASLE,WP No.45). https://doi.org/10.2139/ssrn.860684 DOI: https://doi.org/10.2139/ssrn.860684
Khan Z. S., Islam S. (2013). The Effects of Remittances on Inflation: Evidence from Bangladesh. Journal of Economics & Business Research, 19(2), 198-208.
Klau, & Marc. (1998). Exchange Rate Regime and Inflation and Output in Sub-Saharan Countries. Bank for International Settlements, Monetary and Economic Department (BASLE, WP No. 53). https://doi.org/10.213 9/ssrn.857006 DOI: https://doi.org/10.2139/ssrn.857006
Khan, K. M., Khan, A. M., Ullah M., Usman, A., Farhat, S., (2020). Closing price determination; extent of manipulation and deterrent strategy formulation: a case of Pakistan Stock Exchange. Journal of Critical Reviews, 7(14), 2689-2705.
Lane P.R. & Milesi-Ferretti M. . (2012). External Adjustment and the Global Crisis. . Journal of International Economics, 88(2), 252-265. https://doi.org/10.1016/j.jinteco.2011.12.013 DOI: https://doi.org/10.1016/j.jinteco.2011.12.013
Lane R.P., and Milesi-Ferretti M.G. . (2014). Global Imbalances and External Adjustment after the Crisis 2014. IMF Working Paper Research Department WP/14/151. https://doi.org/10.5089/9781498339216.001 DOI: https://doi.org/10.5089/9781498339216.001
Medina L., Prat, & Thomas J. (2010). Current Account Balance Estimates for Emerging Market Economies. International Monetary Fund, IMF WP/10/43. https://doi.org/10.5089/9781451962994.001 DOI: https://doi.org/10.5089/9781451962994.001
Obstfeld, M., & Rogoff, K. S. (2005). Global Current Account Imbalances and Exchange Rate Adjustments. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 36(1), 67-146. https://doi.org/10.1353/eca.2005.0020 DOI: https://doi.org/10.1353/eca.2005.0020
Pyhrr S., Born W., and Webb J. (1990). Development of a Dynamic Investment Strategy under Alternative Inflation Cycle Scenarios. Journal of Real Estate Research, 5(2), 177-193. https://doi.org/10.1080/10 835547.1990.12090617 DOI: https://doi.org/10.1080/10835547.1990.12090617
Rahman, J. (2008). Current Account Developments in the New Member States of the European Union: Equilibrium, Excess and EU-Phoria. . IMF Working Paper WP/08/92, International Monetary Fund. https://doi.org/10.5089/9781451869538.001 DOI: https://doi.org/10.5089/9781451869538.001
Sbordone A. M. (2007). Inflation persistence: Alternative interpretations and policy implications. Journal of Monetary Economics, Elsevier, 54(5), 1311-1339. https://doi.org/10.1016/j.jmoneco.2007.06.007 DOI: https://doi.org/10.1016/j.jmoneco.2007.06.007
Serven L. & Nguyen H., . (2013). Global Imbalances: Origins and Prospects. World Bank Research Observer, World Bank Group, 28(2), 191-219. https://doi.org/10.1093/wbro/lkt002 DOI: https://doi.org/10.1093/wbro/lkt002
Shaikh, S., Channar, P., Shaikh, M., &, Ullah, M., (2021). Financial constraints and listed sugar mills on Pakistan Stock Exchange. International Journal of Management, 12(3), 70-76. https://doi.org/10.2927 0/JBS.12.2(2018).0118
Sung, B. & Park, S.-D. (2018). Who Drives the Transition to a Renewable-Energy Economy? Multi-Actor Perspective on Social Innovation. Sustainability MDPI, 10, 448. DOI: https://doi.org/10.3390/su10020448
Trabelsi E. (2016). What effects exert Economic Globalization and Central Bank Transparency on inflation of OECD countries? An Application of LSDVC Estimator on a Dynamic Panel Model. Working Papers hal-01157387, HAL. https://doi.org/10.3390/su10020448 DOI: https://doi.org/10.3390/su10020448
Tung T. L., Ly M.T.P., Nhu Q.T.P, Thanh T. P., Anh. (2015). The Impact of Remittance Inflows on Inflation: Evidence in Asian and the Pacific Developing Countries. Journal of Applied Economic Sciences (JAES), 37, 1076-1080.
Ullah, M., Shaikh, M., Channar, P., & Shaikh, S., (2021). Financial forecasting: an individual perspective. International Journal of Management, 12(3), 60-69.
World Bank. (2019). South Asia Economic Focus, Fall 2019 - Globalization Backlash. Washington DC: The World Bank.
Yurdakul, F., & Ucar, B. . (2015). The Relationship Between Current Deficit and Economic Growth: An Empirical Study on Turkey. Science Direct Procedia Economics and Finance 26, 101-108. https://doi.org/10 .1016/S2212-5671(15)00885-0 DOI: https://doi.org/10.1016/S2212-5671(15)00885-0