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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
A brief characterization of Romanian
current account
Econometric estimations
Concluding remarks
Introduction
 Important measure of macroeconomics performance
 Current account deficit: - country’s development
possibilities
- saving-investment imbalance
 Mexican (1994) and Asian (1997) crises
Literature Review
 Different theoretical models that show determinants of
current account dynamics and relation between factors
and current account
 Intertemporal approach
 Empirical evidence
Literature Review-Intertemporal Approach
Current account deficit: outcome of forwardlooking 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)
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)
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
Econometric estimations (1)
Abreviation
Variable
CAD
Ratio between current account and industrial output
COV
Coverage of imports through exports
BUG
Ratio between gouvernment buget balance and industrial output
DEBT
Ratio between external debt and industrial output
FDI
Ratio between foreign direct investments and industrial output
NFA
Ratio between net forigne assets and industrial output
EXR
Logharitmated exchange rate growth
DIFI
Interest rate differential
DUMMY
Dummy variable for January and February 1997
 I used Perron unit roots test
 Current account deficit do not have structural break
Perron
Results
Fig.2
Econometric estimations (2)
 Equation that will be estimated:
CAD = 1COV +2BUG +3 EXR
 Estimation method: Two Stages Least Squares
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]
Econometric estimations (4)
Dependent Variable: CAD
Method: Two-Stage Least Squares
Date: 06/25/02 Time: 11:29
Sample(adjusted): 1994:04 2001:09
Included observations: 90 after adjusting endpoints
Instrument list: CAD(-1) BUG BUG(-3) EXR(-2)
DDEBT(-2) DIFI(-2) DNFA(-2) DUMMY
Variable
Coefficient
COV
BUG
EXR
0.39612
0.176707
-0.086338
R-squared
Adjusted R-squared
S.E. of regression
F-statistic
Prob(F-statistic)
0.444492
0.431722
0.043238
6.845768
0.001733
Test
Q-stat(12)
LM(12)
White(12)
Ramsey
Std. Error
0.12577
0.102724
0.022904
t-Statistic
Prob.
3.149563
1.720209
-3.769576
Mean dependent var
S.D. dependent var
Sum squared resid
Durbin-Watson stat
Value
p - value
10.351
0.588
12.09805
0.437838
5.779059
0.76181
0.376504
0.687395
0.0022
0.0889
0.0003
-0.077642
0.057356
0.162647
2.044938
Econometric estimations (5)
Final equation:
CAD = 0.396120*COV + 0.176707*BUG – 0.086338*EXR
(3.149963)
(1.720209)
(-3.769576)
ELASTICITY
ELASTICITY
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
The current account deficit in 1990-2000
(millions USD)
0
-500
-1000
-1500
-2000
-2500
-3000
-3500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Perron Unit Root Test
The test formula is the following:
k
y t     t  DU t  DTt  D( Tb ) t  y t 1   a i y t i   t
i 1
where: yt – the value of the serie at time t
 - constant
t – time
0, t  Tb
DU = 1, otherwise

0, t  Tb
DTt = t  Tb , otherwise
1, t  Tb
D(Tb) = 0, otherwise
Tb – the point of structural break
yt-1 – the value of the serie at time t-1
yt-i – the first differential lag of the serie
k – number of lags
t – residuals
,,,,,ai – coeficients
Unit Root Tests
Variable
Tipe
Variable
Tipe
CAD
I(0)
DEBT
I(1)
COV
I(0)
NFA
I(1)
BUG
I(0)
EXR
I(0)
FDI
I(0)
DIFI
I(0)
Time Series Used
0. 2
1. 4
0. 1
1. 2
0. 0
1. 0
- 0. 1
0. 8
- 0. 2
0. 6
- 0. 3
94
0. 4
0. 1
0. 0
95
96
97
98
99
00
01
- 0. 1
- 0. 2
94
95
96
97
CA
98
99
00
- 0. 3
94
01
95
96
97
98
99
00
01
CO V
BUG
5. 0
10
0. 6
5
4. 9
0. 4
0
4. 8
0. 2
-5
4. 7
- 10
0. 0
- 15
4. 6
- 0. 2
- 20
4. 5
- 25
94
95
96
97
98
99
00
01
94
95
96
EXR
97
98
99
00
- 0. 4
94
01
95
96
97
DI FI
2
0. 3
1
0. 2
0
0. 1
-1
0. 0
- 0. 1
94
-2
95
96
97
98
FDI
99
00
01
98
DNFA
94
95
96
97
98
DDEBT
99
00
01
99
00
01
The exchange rate impact upon
exports and imports
Dependent Variable: EXPORTS
Method: Least Squares
Date: 06/26/02 Time: 08:55
Sample(adjusted): 1994:02 2001:09
Included observations: 92 after adjusting endpoints
Convergence achieved after 11 iterations
Variable
Coefficient Std. Error
t-Statistic
EXR
AR(1)
0.331975
0.997416
0.072878
0.002738
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.882853
0.881552
0.029718
0.079482
193.9424
2.372216
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
Inverted AR Roots
1
4.55523
364.2273
Dependent Variable: IMPORTS
Method: Least Squares
Date: 06/26/02 Time: 08:55
Sample(adjusted): 1994:02 2001:09
Included observations: 92 after adjusting endpoints
Convergence achieved after 5 iterations
Prob.
0.0000
0.0000
0.368053
0.086347
-4.172661
-4.11784
678.2672
0
Variable
Coefficient Std. Error
t-Statistic
EXR
AR(1)
0.104319
0.904892
0.011854
0.046427
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.808817
0.806693
0.046502
0.194622
152.7479
2.392183
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
Inverted AR Roots
0.9
8.799959
19.49051
Prob.
0.0000
0.0000
0.443278
0.105767
-3.277129
-3.222307
380.7534
0
Positive correlation between exchange
rate and imports and exports
Dependent Variable: IMPORTS
Method: Least Squares
Date: 06/28/02 Time: 23:34
Sample(adjusted): 1994:02 2001:09
Included observations: 92 after adjusting endpoints
Convergence achieved after 5 iterations
Dependent Variable: EXPORTS
Method: Least Squares
Date: 06/28/02 Time: 23:31
Sample(adjusted): 1994:02 2001:09
Included observations: 92 after adjusting endpoints
Convergence achieved after 4 iterations
Variable
Variable
Coefficient Std. Error t-Statistic Prob.
EXR
DUMMY
AR(1)
0.10181 0.011673 8.721709
0.095804 0.033295 2.877456
0.909302 0.045106 20.15938
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.825194
0.821265
0.044715
0.177951
156.8673
2.405291
Inverted AR Roots
0.91
0.0000
0.0050
0.0000
Mean dependent var 0.443278
S.D. dependent var 0.105767
Akaike info criterion -3.34494
Schwarz criterion
-3.26271
F-statistic
210.0674
Prob(F-statistic)
0.0000
Coefficient Std. Error t-Statistic Prob.
EXR
DUMMY
AR(1)
0.091886 0.018252 5.034189
0.083219 0.021331 3.901332
0.955637 0.036133 26.44742
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.890569
0.88811
0.028883
0.074247
197.0765
2.275998
Inverted AR Roots
0.96
0.0000
0.0002
0.0000
Mean dependent var 0.368053
S.D. dependent var 0.086347
Akaike info criterion -4.21906
Schwarz criterion
-4.13682
F-statistic
362.1486
Prob(F-statistic)
0.0000