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The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance

The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance. CURRENT ACCOUNT DEFICIT DETERMINANTS: AN EMPIRICAL ANALYSIS ON ROMANIA MSc. Student: Hândoreanu Cătălina Supervisor: Prof. Moisă Altăr Bucharest, June 2002. Introduction Literature review

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The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance

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  1. The Academy of Economic Studies BucharestDoctoral School of Banking and Finance CURRENT ACCOUNT DEFICIT DETERMINANTS: AN EMPIRICAL ANALYSIS ON ROMANIA MSc. Student: Hândoreanu Cătălina Supervisor: Prof. Moisă Altăr Bucharest, June 2002

  2. Introduction • Literature review • A brief characterization of Romanian current account • Econometric estimations • Concluding remarks

  3. Introduction • Important measure of macroeconomics performance • Current account deficit: - country’s development possibilities - saving-investment imbalance • Mexican (1994) and Asian (1997) crises

  4. Literature Review • Different theoretical models that show determinants of current account dynamics and relation between factors and current account • Intertemporal approach • Empirical evidence

  5. Literature Review-Intertemporal Approach • Current account deficit: outcome of forward-looking dynamic saving and investment decision by expectation of productivity growth, government spending and interest rates • Obstfeld and Rogoff (1994, 1995) • Cashin and McDermott (1996) • Ostry (1997) • Callen and Cashin (1999) • Kim, Hall and Buckle (2001)

  6. Literature Review- Empirical evidence • Panel data • Different factors • Chinn and Lee (1998) • Calderon, Chong and Loayza (1999) • Roubini Wachtel (1999) • Chin and Prasad (2000) • Calderon, Chong and Zanforlin (2001) • Lane and Milesi-Ferretti (2002)

  7. A brief characterization of Romanian current account • Until 1989 - current account surplus • Since 1990 - current account deficit • Current account deficit of 8.5% of GDP in 1990 • Another peak of 7.2% of GDP in 1998 • Sudden reduction of current account deficit in 1999 and 2000 Fig.1

  8. Econometric estimations (1) • I used Perron unit roots test • Current account deficit do not have structural break Perron Results Fig.2

  9. Econometric estimations (2) • Equation that will be estimated: CAD = 1COV +2BUG +3 EXR • Estimation method: Two Stages Least Squares

  10. Econometric estimations (3) • First step: the selection of instrumental variables • Candidates for the role of instrumental variables: -three periods lagged values of endogenous variables -present and three periods lagged values of exogenous variables • The selection of the instrumental variables is based on the statistical significance of the candidate variables in the regression of the endogenous variables on all the candidate variables • Instrumental variables resulted: [CAD(-1), BUG, BUG(-3), EXR(-2), DDEBT(-2), DNFA(-1), DIFI(-2) DUMMY]

  11. Econometric estimations (4)

  12. Econometric estimations (5) • Final equation: CAD = 0.396120*COV + 0.176707*BUG – 0.086338*EXR (3.149963) (1.720209) (-3.769576) ELASTICITY ELASTICITY

  13. Concluding remarks • There is: - a positive correlation between “twin deficits” - a positive correlation between current account deficit and coverage imports through exports - a negative correlation between current account deficit and exchange rate • Positive correlation between exchange rate and both exports and imports • Annual data are necessary

  14. The current account deficit in 1990-2000 (millions USD)

  15. Perron Unit Root Test

  16. Unit Root Tests

  17. Time Series Used

  18. The exchange rate impact upon exports and imports

  19. Positive correlation between exchange rate and imports and exports

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