Current Account Imbalances and the Adjustments to an Equilibrium Target for Regional Integration in


Chuku Chuku _1, Johnson Atan2, and Felix Obioesio y2

1 Department of Economics, University of Uyo, Uyo, Nigeria and Centre for

Growth and Business Cycle Research, University of Manchester, U.K

2Department of Economics, University of Uyo, Nigeria.

This version: March, 2016

Extended Abstract

1 Introduction

1.1 Background

The main questions we address in this study are whether the observed current account

imbalances and its dynamics in West Africa is persistent, and how they should be adjusted

to converge to an equilibrium long-run target that would be consistent with the regional

integration objectives being pursued in West Africa. Our approach is two fold. First, we seek

to determine the long-run determinants of current account imbalances in West Africa, using

panel cointegration techniques. Second, we use the results from the _rst stage to calculate

the long-run targets that current account balances should converge to, and the speed of that

convergence, which are consistent with regional integration.

The task of ascertaining the determinants of current account dynamics (hereafter, CA

dynamics) for both developed and developing economies has been a topic of intense academic

and policy debate. The interest on CA dynamics emerges due primarily to the fact that its

evolution is a crucial indicator of the relative health of the external sector of an economy, and

_chukuachuku@gmail.com, chukuchuku.econs.lect@uniuyo.edu.ng; Phone +234 806 724 7177

yfelixobioesio@yahoo.com

1

this is a key dimension for the process of regional integration. Similarly, the keen interest

dedicated to CA dynamics is also underscored by the need to arrive at a clear understanding

of the key macroeconomic factors that contribute most signi_cantly to CA dynamics and

what strategies to be developed to remedy such situation.

One of the theoretical frameworks that has been advanced and employed to analyse the

determinannts of CA dynamics is the intertemporal approach that was initially proposed by

Sachs (1981) and thoroughly extended by Obstfeld and Rogo_ (1995, 1996). The standard

intertemporal model of the current account considers the current account from the saving-

investment perspective in a two period horizon and features an in_nitely lived representative

household who smoothe consumption over time by lending or borrowing abroad to cushion

transitory uctuations in income. For example, this approach suggests that a country would

run a current account de_cit if income temporarily falls below its trend value or investment is

temporarily high. This standard intertemporal current account (ICA) model represents an

appropriate tool to analyze current account balances in developed and developing countries

alike.

Among the recent set of empirical studies that attempt to address this issue include Debelle

and Faruqee (1996) using dynamic panel methods. Utilizing the intertemporal approach to

the CA, they analysed a cross-section of 21 industrialized countries over the period 1971-1993

by means of between and dynamic _xed-e_ects (FE) regressions. More recently, studies by

Chinn and Prasad (2003) for a larger panel including many developing economies, Bussi_ere

et al. (2004) for OECD and EU acceding countries as well as Calder_on et al. (2002) for

developing economies have also relied on dynamic FE estimation.

However, these studies are at best characterized by diverging conclusions and hence they

give di_erent predictions about the elements determining the CA dynamics as well as the

sign and magnitude of the relationships between the CA uctuations and its determinants.

Again, the characterization of developing countries and their structural peculiarities o_ers

an opportunity to explore the determinants of CA dynamics in the context of developing

countries, with particular emphasis in West Africa. As noted by Calderon et al. (2007) a

stylized characterization of the Africa and its sub-regions includes de_cits in the current

account that have been very large in recent years, dismal rates of growth, strong reliance

on foreign aid, low public and private savings, concentration of exports on single primary

products, and large distortions in the economy. All of these characteristics emphasize the fact

that understanding the determinants of current account balances in Africa in general, and

West Africa in particular is crucial, in order to understand policy implications not only in

terms of magnitude but, given the many peculiarities of the region, also in terms of direction.


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