Current Account Dynamics in Iran: An Intertemporal Approach

Mehrara, Maryam; Gholami, Amir

doi:10.48308/jep.4.1.273

Current Account Dynamics in Iran: An Intertemporal Approach

Document Type : Original Article

Authors

Maryam Mehrara ¹
Amir Gholami ²

¹ Ph.D of Economics, College of Management and Social Science,North Tehran Branch, Islamic Azad University, Tehran, Iran

² Assistant Professor, Department of Economics, College of Management and Social Science,North Tehran Branch, Islamic Azad University, Tehran, Iran.

10.48308/jep.4.1.273

Abstract

We aim to highlight the asymmetric relationship between the current account balance and variables of fundamental macroeconomic and macroeconomic stability in the nonlinear boundary test approach in Iran, for the period 1978-2020. The main focus of this research is on the intertemporal approach to the current account views the current account as the difference between domestic saving and domestic investment and focused on macroeconomic factors that determine these two variables. The primary purpose of this research is to assist in the formulation of appropriate economic policies to minimize any negative effects of the current account deficit on the economy. The nonlinear boundary test approach method is used in this article due to the possibility of long-term nonlinear relationships between the current account deficit and financial balance, inflation rate, KOF index, net foreign assets, real effective exchange rate, total investment, terms of trade and GDP per capita growth. According to the analysis findings, there is a long-term cointegration relationship between variables. It is seen that while there exists long-term asymmetry between the current account deficit, net foreign assets, and financial balance the coefficients themselves are not statistically significant. However, the effect of the real effective exchange rate and the Terms of Trade on the current deficit is statistically significant and substantial. The asymmetric cointegration result confirms, between the current account deficit and the inflation rate, KOF index, total investment, terms of trade, and GDP per capita growth a long-run integration exists.

Keywords

20.1001.1.27171485.2023.4.1.11.5

References

Acar, R. (2020). Monetary Model of Exchange rate for Argentina: an Autoregressive Distributed lag (ARDL) Approach. Washington State University.

Adeleke, A. I., Ohemeng, W., & Ofori-Boateng, K. (2017). Savings, Net Foreign Assets and Current Accounts Dynamics in SubSaharan Africa. CBN Economic and Financial Review, 55(1): 1-27.

Aizenman, J. (1994). Monetary and Real Shocks, Productive Capacity and Exchange Rate Regimes. Economica, 61: 407-434.

Altayligil, Y. B., & Çetrez, M. (2020). Macroeconomic, Institutional and Financial Determinants of Current Account Balances: a Panel Data Assessment. Journal of Economic Structures, 9(1): 1-23.

Alleyne, D., Lugay, B., & Dookie, M. (2011). The Relationship between Fiscal and Current Account Balances in the Caribbean.

Bahmani-Oskooee, M., & Fariditavana, H. (2015). Nonlinear ARDL Approach, Asymmetric Effects and the J-curve. Journal of Economic Studies. 42 (3): 519-530.

Begović, S., & Kreso, S. (2017). The adverse effect of real effective exchange rate change on trade balance in European transition countries. Zbornik radova Ekonomskog fakulteta u Rijeci: casopis za ekonomsku teoriju i praksu, 35(2): 277-299.

Bussière, M., Fratzscher, M., & Müller, G. J. (2004). Current Account Dynamics in OECD and EU Acceding Countries-an Intertemporal Approach. Available at SSRN 515074.

Berka, M., Devereux, M. B., & Engel, C. (2012). Real Exchange Rate Adjustment in and out of the Eurozone. American Economic Review, 102(3): 179-85.

Bernanke, B. S. (2005). The Global Saving glut and the US Current Account Deficit (No. 77).

Boroumand Jazi Sh., Kahram A. (2005). The Effect Of Budget Deficit & Exchange Rate On Iran's Foreign Balance Of Payments Of Current Account Deficit, Economic Research Review, 5(2): 113-130.

Brzozowski, M., & Prusty, S. (2013). Impact of GDP Volatility on Current Account Balances. International Journal of Economics and Business Research, 5(3): 239-252.

Ieaney, M., & Tian, M. (2019). Net Foreign Assets and Current Account Balances (No. 2019/06).

Bussière, M., Fratzscher, M., & Müller, G. J. (2004). Current Account Dynamics in OECD and EU Acceding Countries-an Intertemporal Approach. Available at SSRN 515074.

Calderon, C., Chong, A., & Loayza, N. (2000). Determinants of Current Account Deficits in Developing Countries.

Cheah, S. P., Yiew, T. H., & Ng, C. F. (2017). A Nonlinear ARDL Analysis on the Relation between Stock price and Exchange Rate in Malaysia. Economics Bulletin, 37(1): 336-346.

Chuku, C. A., Atan, J. A., Obioesio, F., & Obi, K. O. (2017). Current Account Adjustments and Integration in West Africa. African Development Bank.

Chowdhury, K., & Saleh, A. S. (2007). Testing the Keynesian Proposition of Twin Deficits in the Presence of Trade Liberalization: Evidence from Sri Lanka.

Chinn, M. D., & Wei, S. J. (2013). A Faith-based Initiative meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?. Review of Economics and Statistics, 95(1): 168-184.

Ciocyte, O., & Rojas-Romagosa, H. (2015). Literature Survey on the Theoretical Explanations and Empirical Determinants of Current Account Balances. CPB Netherlands Bureau for Economic Policy Analysis, Background Document, April.

Coutinho, L., Turrini, A., & Zeugner, S. (2018). Methodologies for the Assessment of Current Account Benchmarks (No. 086). Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American statistical association, 74(366a): 427-431.

Dreher, A. (2006). Does Globalization Affect Growth? Evidence from a New Index of Globalization. Applied economics, 38(10): 1091-1110.

Ghosh, A. R., Qureshi, M. S., & Tsangarides, C. G. (2013). Is the Exchange Rate Regime Really Irrelevant for External Adjustment?. Economics Letters, 118(1): 104-109.

Ghosh, A., Qureshi, M., & Tsangarides, C. (2014). The Cost of Tying one’s hands. Finance & Development, 51(2): 42-46.

Gygli, S., Haelg, F., Potrafke, N., & Sturm, J. E. (2018). The KOF Globalization Index-Revisited.

Ung, J. H., & Bronowski, C. (2002). Modeling the US Current Account as the Savings-Investment Balance. Congressional Budget Office.

Herrmann, S. (2009). Do We Really Know that Flexible Exchange Rates Facilitate Current Account Adjustment? Some new Empirical Evidence for CEE Countries.

Isik. N., Yilmaz, S. S., & Kiling, E. C. (2017). The Relationship between Current Account Balance and Types of credits: An Application on Selected OECD Countries. Journal of the Faculty of Economics and Administrative Science, 7(2): 105-126.

Kouton, J. (2018). An Asymmetric Analysis of the Relationship between Openness and Inflation in Côte d’Ivoire. International Journal of Economics and Financial Issues, 8(6): 65.

Lee, J., & Strazicich, M. C. (2003). Minimum LM Unit Root test with one Structural Break. Economics bulletin, 85: 1082–9.

Marimuthu, M., Khan, H., & Bangash, R. (2021). Reverse Causality between Fiscal and Current Account Deficits in ASEAN: Evidence from Panel Econometric Analysis. Mathematics, 9(10): 1124.

Mahmoudzadeh, M., and Asgharpour, H. (2009). Factors, Affecting Current Account Deficit In Iran, ECONOMIC MODELLING, 2(6): 53-78.

Moccero, D. N. (2008). The Intertemporal Approach to the Current Account: Evidence for Argentina. Journal of Applied Economics, 11(2): 327-353.

Na, M., Li, Y., & Li, K. (2015). Relationship between Japan’s Renewable Energy Generating Capacity and Economic Growth Based on ARDL Model. The Open Fuels & Energy Science Journal, 8(1): 28-32.

Obstfeld, M., & Rogoff, K. (1995). The Intertemporal Approach to the Current Account. Handbook of International Economics, 3: 1731-1799.

Obstfeld, M., Rogoff, K. S., & Rogoff, K. (1996). Foundations of International Macroeconomics. MIT Press.

Odedokun, M. (2003). The ‘Pull’and ‘Push’Factors in North-South Private Capital Flows. United Nation University, Discussion Paper, (2003/43).

Oshota, S. O., & Badejo, A. A. (2015). What Drives Current Account Balance in West Africa States: Evidence from Panel ARDL. Journal of International and Global Economic Studies, 8(2): 91-105.

Pesaran, M. H., Pesaran, B. (1997).Working with Microfit 4.0: Interactive Econometric Analysis, Oxford University Press.

Pesaran, M. H., & Smith, R. P. (1998). Structural Analysis of Cointegrating VARs. Journal of economic surveys, 12(5): 471-505.

Prasad, M. E. S., & Chinn, M. D. (2000). Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration (No. 2000/046). International Monetary Fund.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of applied econometrics, 16(3): 289-326.

Sachs, J. (1982). 0The Current Account in the Macroeconomic Adjustment Process. pScandinavian Journal of Economics, 84: 147-159.

Santos-Paulino, A. U. (2007). Terms of Trade Shocks and the Current Account in Small Island States (No. 2007/20). WIDER Research Paper.

Salimifar, M., Razmi, M. J., & Taghizadegan, Z. (2015). A Survey of the Effect of Trade Openness Size on Inflation Rate in Iran Using ARDL. Theoretical & Applied Economics, 22(3). 143-154 (In Persian)

Sarfaraz, A.S.S. (2012). Does Greater Economic Openness Grasp the Elements of Inflation ‘Surprise’? New Evidence Using Panel data Techniques. International Economics, 130, 33-58.

Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In Festschrift in Honor of Peter Schmidt (pp. 281-314). Springer, New York, NY.

Taghavi, M., and Kehram, A. M (2005). Investigating the Relationship between Current Account Deficit and Term of Trade in Iran's Economy, Economic Research Review: 3(18): 163-191. (In Persian)