The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance CURRENT ACCOUNT DEFICIT DETERMINANTS: AN EMPIRICAL ANALYSIS ON ROMANIA.

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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

zIntroduction zLiterature review zA brief characterization of Romanian current account zEconometric estimations zConcluding remarks

Introduction zImportant measure of macroeconomics performance zCurrent account deficit: - country’s development possibilities - saving-investment imbalance zMexican (1994) and Asian (1997) crises

Literature Review zDifferent theoretical models that show determinants of current account dynamics and relation between factors and current account zIntertemporal approach zEmpirical evidence

Literature Review-Intertemporal Approach zCurrent account deficit: outcome of forward- looking dynamic saving and investment decision by expectation of productivity growth, government spending and interest rates zObstfeld and Rogoff (1994, 1995) zCashin and McDermott (1996) zOstry (1997) zCallen and Cashin (1999) zKim, Hall and Buckle (2001)

Literature Review- Empirical evidence zPanel data zDifferent factors zChinn and Lee (1998) zCalderon, Chong and Loayza (1999) zRoubini Wachtel (1999) zChin and Prasad (2000) zCalderon, Chong and Zanforlin (2001) zLane and Milesi-Ferretti (2002)

A brief characterization of Romanian current account zUntil current account surplus zSince current account deficit zCurrent account deficit of 8.5% of GDP in 1990 zAnother peak of 7.2% of GDP in 1998 zSudden reduction of current account deficit in 1999 and 2000 Fig.1

Econometric estimations (1) zI used Perron unit roots test zCurrent account deficit do not have structural break ResultsFig.2Perron

Econometric estimations (2) zEquation that will be estimated: CAD =  1 COV +  2 BUG +  3 EXR zEstimation method: Two Stages Least Squares

Econometric estimations (3) zFirst step: the selection of instrumental variables zCandidates for the role of instrumental variables: -three periods lagged values of endogenous variables -present and three periods lagged values of exogenous variables zThe 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 zInstrumental variables resulted: [ CAD(-1), BUG, BUG(-3), EXR(-2), DDEBT(-2), DNFA(-1), DIFI(-2) DUMMY]

Econometric estimations (4)

Econometric estimations (5) zFinal equation: CAD = *COV *BUG – *EXR ( ) ( ) ( ) ELASTICITY

Concluding remarks zThere 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 zPositive correlation between exchange rate and both exports and imports zAnnual data are necessary

The current account deficit in (millions USD)

Perron Unit Root Test

Unit Root Tests

Time Series Used

The exchange rate impact upon exports and imports

Positive correlation between exchange rate and imports and exports