Current account and relative prices: cointegration in the presence of structural breaks in emerging economies

Uz, Idil and Ketenci, Natalya (2010): Current account and relative prices: cointegration in the presence of structural breaks in emerging economies.

Abstract

The aim of this study is to examine the long-run relationship between the current account and relative prices such as terms of trade and real exchange rate for the emerging economies. These variables have been exposed to large fluctuations for more than the last two decades nearly in all emerging economies. Therefore, structural breaks have to be taken into account in estimations. Therefore, the recent panel cointegration method developed by Westerlund (2006) was applied to the current account model allowing for structural breaks. The estimations of unit root tests proposed by Levin et al. (2002), Im et al. (2003) and by Hadri (2000) provided the evidence of the unit root existence in our series. The Hansen’s (1992) stability test illustrated the instability exist in series except for the cases of India and Turkey. The Westerlund (2006) cointegration test estimations detected multiple structural shifts in every panel case; however, the hypothesis of cointegration in the panel could not be accepted by the Lagrange Multiplier statistics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Current account; Terms of trade; Panel cointegration; Structural breaks
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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