- Title
- New perspectives on current account dynamics in the Pacific Island economies
- Creator
- Sami, Janesh
- Relation
- University of Newcastle Research Higher Degree Thesis
- Resource Type
- thesis
- Date
- 2017
- Description
- Research Doctorate - Doctor of Philosophy (PhD)
- Description
- The objective of this thesis is to empirically investigate the sustainability, determinants, and growth impact of current account deficit (CAD) in the six Pacific Island Economies (PIEs). Following the outbreak of Global Financial Crisis (GFC) in 2007, current account position of many economies around the world has deteriorated. Within the developing economies, the PIEs experienced exceptionally large CAD. This alongside escalating external debt levels since 2005, amidst volatile economic growth rates and political instability has placed pressured on fixed exchange regime and exacerbated economic vulnerability for the PIEs. Existing time series data suggest that CAD is not a new recent phenomenon, since these economies have been experiencing worsening current account position as early as the 1980s. Given the low levels of private investment and savings, large deficit in the PIEs is driven by fiscal imbalances and consumption spending. Furthermore, existing studies have shown that CAD reduces savings and raise external debt in the PIEs. In light of these macroeconomic policy challenges, this thesis undertakes three empirical studies on the sustainability, determinants, and growth effects of CAD in the PIEs in the post-independence period (1970-2013). The first empirical essay investigates the sustainability of CAD in the PIEs. In the first part of the essay, sustainability of CAD is investigated using qualitative approach that involves analysing changes in CAD relative to developments in different economic, political, and structural aspects of the economies over time. The analysis suggests that CAD is unsustainable. In the second part of the essay, linear autoregressive distributed lag (ARDL) cointegration test of Pesaran, Shin, and Smith (2001) and nonlinear ARDL cointegration test of Shin, Yu, and Greenwood-Nimmo (2014) are employed. It is found that necessary condition for intertemporal budget constraint (IBC) to hold is not met in the PIEs. In the third part of the essay, based on the sub-sample analysis (2007-2013), it is shown that CAD has been unsustainable in post-GFC period. The results are shown to be robust to use of alternative econometric methodology and choice of theoretical framework and variable measurement. In the fourth part of the essay, the traditional Husted (1992) model is extended to incorporate remittances, in order to examine its role in addressing unsustainable CAD in the PIEs. The empirical analysis indicates that: a) CAD in the PIEs has been on an unsustainable path over the last four decades; b) Consideration of economic, political, structural aspects of the economy enhances the analysis of current account sustainability; c) CAD in the post – GFC period has been unsustainable in the PIEs, suggesting that recent foreign borrowing made by the PIEs has been against an unsustainable external position; d) Remittances cannot help address unsustainable CAD in the PIEs. The second empirical essay investigates the determinants of CAD in the six PIEs using unbalanced panel dataset over the post-independence period. This essay extends upon previous work on developing economies; however, derives and uses a new broad reduced-form specification to investigate the underlying determinants of CAD in the PIEs. By resorting to non-stationary panel data analysis and accounting for possible cross-sectional dependency, cross-country heterogeneity, endogeneity, the essay finds that the real exchange rate is the major determinant of CAD in the PIEs. This finding is robust to a number of robustness checks such as: a) controlling for additional variables, nonlinearity and persistency; b) controlling for presence of interactive effects; c) controlling for different sample period; d) controlling for country-sample bias; e) controlling for the impact of the Asian Financial Crisis (AFC) and GFC; f) controlling for different variable measurements; and g) controlling for measurement errors and presence of outliers. The essay also finds that political instability interacts with the fiscal deficit and worsens the current account position of the PIEs. The third empirical essay investigates the impact of CAD in the balance of payment (BOP) for economic growth in the PIEs. While there has been emerging interest in CAD in an open economy macroeconomics context, its growth consequences are yet to be understood. Employing the theoretic framework of Thirlwall (1979) and recently developed unit root and cointegration test with multiple structural breaks, this essay shows the significance of addressing BOP constraint to achieve economic growth in the PIEs over the post-independence period. The results indicate that economic growth in majority of the PIEs over the last four decades have been constrained by CAD in the BOP. The three empirical essays have important implications from a theoretical, empirical and policy perspective. The major contribution of the first essay is that it illustrates that CAD in the PIEs has been unsustainable over the last four decades and even since the outbreak of the GFC. This does not only imply that recent foreign borrowing has been made against unsustainable external position but also suggests that past macroeconomic policy reforms have failed to address persistent CAD in the PIEs. More importantly, these findings warn that in absence of major policy reforms in the near future to improve external sector performance (that is, to boost exports earnings), the PIEs are likely to face serious challenges in meeting their external debt obligations. The major contribution of the second essay is that it derives and employs a new specification that incorporates recent theoretical developments and uses recently developed panel methods to investigate CAD for a developing region unexplored in the literature. The major implication of findings from the second essay is the need for political, fiscal and exchange rate reforms in the PIEs to ensure political stability, curb real exchange-rate overvaluation, and maintain fiscal discipline to address the region’s persistent CAD. The major contribution of the third essay is that it carefully analyses the time series and cointegration properties considering possible presence of structural breaks and shows the importance of addressing CAD in order to improve economic growth prospects in the PIEs. Thus, in order to relax the BOP constraint, policy makers should identify and develop sectors that could generate high-value exports (through establishments of tax free zones and provision of better transport infrastructure, etc) and improve export growth. Growth strategies by the PIEs that focus solely on supply-side factors (inputs, technology, etc) and ignore the BOP constraint are likely to result limited success.
- Subject
- current account; Pacific Island economies
- Identifier
- http://hdl.handle.net/1959.13/1335898
- Identifier
- uon:27509
- Rights
- Copyright 2017 Janesh Sami
- Language
- eng
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