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Sustainability of current account balance in ASEAN countries: Evidence from a panel error correction model

Hassan, K., Hoque, A.ORCID: 0000-0001-8369-6653 and Rao, A. (2015) Sustainability of current account balance in ASEAN countries: Evidence from a panel error correction model. The Journal of Developing Areas, 49 (6). pp. 189-204.

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Sustained current account deficit and surplus are not good for an economy. Before 1997 financial crisis South East Asian countries experienced current account deficit, while after the crisis most of them have current account surplus. This paper is motivated by the absence of research on current account sustainability issues in selected crisis affected countries, namely, Indonesia, Malaysia, the Philippines, and Thailand, within the framework of panel cointegration and error correction methods. The paper employs panel unit root, panel cointegration and panel dynamic OLS (PDOLS) methods to assess current account sustainability. Based on an inter-temporal analytical framework the paper examines co-integrating relationship between export as percentage of GDP (indicated by X) and the sum of import and interest on long-term external borrowing, both as percentage of GDP (indicated by MM). The paper also estimates current account sustainability parameter by PDOLS. Annual data from 1970 to 2013 for Indonesia, Malaysia, the Philippines, and Thailand are sourced from World Development Indicator 2012 & 2014. Exports, imports, and GDP data are in current US dollars. The interest payment on long-term external borrowing is used as a proxy for interest on net foreign debt. All variables are expressed as percentage of GDP. Different econometric tests indicate that X and MM are non-stationary at level; however, stationary at first difference. Panel co-integration tests indicate that the variables are co-integrated, which indicates that there is long-run equilibrium relationship between X and MM. Error correction parameter indicates that it takes less than four years to correct short-run disequilibrium. PDOLS estimate shows that the sustainability coefficient is 1 (one).Panel co-integration and PDOLS results together indicate that current accounts in the sample countries are strongly sustainable. This finding is consistent with previous single country study. This finding supports that the current account balance reflects the optimal decisions of the borrowers and lenders; therefore, policy intervention to correct the balance is unwarranted and could reduce welfare. To avoid future crises, policymakers should pay attention to other issues, such as supporting long-term capital flows and liberalizing short-term capital movements.

Item Type: Journal Article
Murdoch Affiliation(s): School of Management and Governance
Publisher: Tennessee State University College of Business
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