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Purpose: This is a theoretical paper in the field of international macroeconomics. The purpose of this paper is to focus on a dynamic interaction between current account imbalance and unemployment in response to some policy-induced shocks for a small open economy under a flexible exchange rate. Design/methodology/approach: The paper uses a two-sector framework: one sector is traded and another is the non-traded sector that is subject to an effective demand constraint. The current account imbalance arises due to the discrepancy between production of traded goods, household consumption of traded goods and government purchases of importables. The authors keep the asset structure simple by considering only domestic currency and foreign bonds that are imperfect substitutes. The paper considers a standard methodology of dynamic adjustment process involving change in foreign exchange reserves and exchange rate under perfect foresight. The saddle path properties of the equilibrium are also examined. Findings: The results of comparative static exercises depend on a set of structural features of a developing country, which include asset substitutability, wage price rigidity and sectoral asymmetries. The paper shows that expansionary monetary policy, balanced budget fiscal expansion and financial liberalization have an ambiguous effect on the current account balance, foreign exchange reserves, non-traded sector and the level of employment. Originality/value: The existence of Keynesian unemployment with fixed prices is the key ingredient of this paper. The paper introduces the problem of effective demand to analyze the dynamics of current account balance and exchange rate, which, in turn, determine the sectoral composition of output and level of employment. [ABSTRACT FROM AUTHOR]

Purpose: Large or increasing stocks of non-performing loans in the banking sector constitute threats to financial stability. This paper considers to which extent various macroeconomic and macro-financial factors may serve as leading indicators for the dynamics of the ratio of non-performing loans to total loans. Design/methodology/approach: The paper estimates panel data models for all EU countries and two groups of EU countries using quarterly data over approximately 20 years. Findings: The estimations show that many macroeconomic and macro-financial variables are leading indicators for non-performing loans in the EU countries, even years ahead. Higher GDP growth, lower inflation and lower debt are robust leading indicators of a lower ratio of non-performing loans in the future. The current account balance and real house prices are important indicators for the Western European group but not for the Central and Eastern European group. Research limitations/implications: The estimations are carried out for panels of EU countries and the effects may hence be seen as averages for the countries in the particular panel and may not apply for individual countries. Practical implications: National and international authorities have brought in systems to detect and address imbalances and emerging problems in the financial sectors. Many of the measures operate with long lags, and so it is important to assess whether various macroeconomic and macro-financial variables may serve as leading indicators for future developments of non-performing loans. Originality/value: The main contribution of the paper is that it estimates models meant expressly for predicting non-performing loans several years ahead. The results are thus of practical use for national and international authorities which typically have access to measures that operate with a long delay. The analysis also includes more macroeconomic and macro-financial variables as leading indicators than have typically been used in earlier studies. [ABSTRACT FROM AUTHOR]

Purpose The purpose of this paper is to contribute to the literature on demand-driven Keynesian growth in open economies by developing a formal model that combines Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model into a more general specification. Then, based on the model developed in this paper, the authors analyse more broadly some important issues concerning the net impact of currency depreciation on the short-run growth.Design/methodology/approach The authors build upon Dixon and Thirlwall’s (1975) export-led growth model and Thirlwall’s (1979) balance-of-payments constrained growth model in order to develop the theoretical framework. The authors also run numerical simulations to illustrate the net impact of devaluation on the short-run growth rate in different scenarios.Findings The authors demonstrate that the net impact of currency devaluation on growth can go either way, depending on some structural conditions such as the average share of imported intermediate inputs in prime costs of domestic firms and the institutional capacity of trade unions to set nominal wages through the bargaining process. The model also shows that the effectiveness of a competitive real exchange rate to promote growth is higher in countries where the share of labour in domestic income is also higher.Research limitations/implications This paper provides a coherent formal starting-point for further theoretical developments on the interrelatedness between currency devaluation, income distribution and growth. These findings provide empirically testable hypothesis for future research.Originality/value The present study proposes an alternative formal solution for the theoretical problem of imposing a balance-of-payments constraint on the process of cumulative causation often incorporated in Kaldorian growth models. In terms of policy, the framework sheds further light on the relevance of income distribution and the labour market institutional framework for the dynamics of the exchange rate pass-through mechanism and allows us to map out related conditions under which currency devaluation can promote growth. [ABSTRACT FROM AUTHOR]

Purpose The purpose of this paper is to argue that financial development, measured by private credit in the economy, affects exports in an inverted U-shaped manner. The authors use the new trade theory model and empirical data to analyze whether the financial system is the reason of global imbalance.Design/methodology/approach This paper builds a simple production model to connect financial development with a country’s export or outward foreign direct investment (ODI) decision. Using a panel data covering 108 countries for the period 1990-2011, the authors find strong evidence to show that when a country is at a lower financial development level, further advancements of its financial system will boost exports.Findings First, an inverted U-shaped relationship between exports, imports and financial development is found in the study of 108 countries over the period 1990-2011; second, ODI provides a substitute effect to exports for financially advanced countries. These findings have provided an alternative explanation to international trade imbalances and contribute constructively to the discussion regarding whether exports and financial development are positively related or not.Originality/value As a result, the findings shed some light on the issue of global current account imbalances between developing and developed countries from a new perspective. [ABSTRACT FROM AUTHOR]

Purpose The purpose of this paper is to estimate the relationship between the current account (CA) and fiscal deficit (FD), and the real exchange rate for India, for the managed float period 1996 Q2 to 2015 Q4, after controlling for output growth and oil shocks. It also examines the cyclicality of the CA, the size of each shock, and assesses whether aggregate demand, forward-looking smoothing, or supply shocks dominate outcomes.Design/methodology/approach The authors use several variants of structural vector autoregression (SVAR), implemented with quarterly Indian data, to control for effects of oil prices, and the output cycle, and then see how FD shocks affect the current account deficit (CAD) and the real exchange rate. For robustness, the authors tried different identifications, changed variable definitions, added new variables, or substituted with other variables. The cyclicality issue is addressed by examining the effect of growth shocks. The relative size of each shock is assessed through co-movement decompositions of the forecast errors. Responses to shocks help identify dominant influences on India’s CAD.Findings The CAD is found to be countercyclical. A FD shock raises the CAD, but high impact growth shocks and large variance oil shocks lead to overall divergence of the deficits. There is some support for the aggregate demand channel, but it is moderated by supply shocks and compositional effects. Consumption is sticky rather than forward-looking.Originality/value The paper contributes to the literature by including supply shocks, compositional effects, cyclicality, real interest and exchange rate in a theoretically and empirically consistent way for the analysis of twin deficits. The large empirical literature on twin deficits in EMs has not yet done this. There is no study using quarterly data in an SVAR allowing the dynamic relationship between the variables to be explored. The extensions bring in the supply side and compositional effects qualify the working of both the channels, with empirical exercises supporting theoretical predictions. [ABSTRACT FROM AUTHOR]

Purpose: In this paper, the authors develop and estimate a small open economy dynamic stochastic general equilibrium (DSGE) model with an enriched micro-founded specification to account for foreign remittances, an important source that helps bridge the trade gap in many developing and emerging market economies. Design/methodology/approach: Although the authors' specification provides a general frame for the analysis of the role of workers' remittances, they motivate and calibrate the model with specific focus on Pakistan, where most of the trade deficit is met through the remittance channel. Findings: The results indicate that a negative shock to workers' remittances hampers real growth via decreased consumption and imported investment goods, while it builds pressure on exchange rate and hence worsens current account balance. These results indicate that too much dependence on workers' remittances to help meet foreign exchange deficits may potentially leave the economy in doldrums in case sizable negative shocks occur to the flow of foreign remittances. Originality/value: The authors develop and estimate a small open economy DSGE model with an enriched micro-founded specification to account for foreign remittances, an important source that helps bridge the trade gap in many developing and emerging market economies. [ABSTRACT FROM AUTHOR]

Purpose – The purpose of this paper is to determine whether current account imbalances – surpluses or deficits – are "excessive" and hence constitute a valid concern. The second objective is to assess the degree of capital mobility by comparing the variance of the current account derived from the intertemporal model with that of the actual current account. Design/methodology/approach – The paper addresses the issues by constructing the intertemporal model using annual data between 1960 and 2006. The authors applied the F-test, the Bartlett test and the Siegel-Tukey test to formally validate for equality of the variances of the optimal and actual consumption smoothing current accounts. Findings – Based on vector autoregressive model, it was found that the present value of future net output closely reflects the evolution of the current account series with a small (insignificant) deviation between the actual and the estimated consumption-smoothing current account. The results show that the hypothesis of full-consumption smoothing could not be rejected by the data for the full sample period, implying that the degree of capital mobility was quite high, even during the post-1997 period. The variance ratio of the actual current account to the optimal current account is not statistically greater than one. Therefore, it is concluded that there is no evidence to suggest inappropriate use of capital flows over the entire sample period under investigation. Originality/value – The authors relied on a more general framework, as suggested by Bergin and Sheffrin, which allows real interest rate to affect current account in order to provide a new perspective on Thailand's current account balance. [ABSTRACT FROM AUTHOR]

Purpose - The purpose of this paper is to contribute further on the twin deficits debate in a developing economy. Design/methodology/approach - The data for Thailand over three decades are used as a case study. Findings - The major findings are: first, a stable, long-run equilibrium relationship between fiscal deficit, interest rate, exchange rate, and current account was found. Second, the causal relationship between the two deficits runs from fiscal deficit to current account deficit. This evidence is supportive of the twin deficits hypothesis. Further econometric analysis reveals that the two financial variables (interest rate and exchange rate) act as intermediating variables - that is an increased fiscal deficit causes interest rate to rise, and this in turn puts pressure on the exchange rate. The appreciation of the domestic currency causes a current account deficit. Originality/value - The paper is of value by showing both direct and indirect channels to uncover the twin deficits phenomena. Based on a persistent profile response, it was found that the adjustment process may take as long as a year to complete. [ABSTRACT FROM AUTHOR]

Purpose - To test the Feldstein-Horioka hypothesis that the investment-to-output ratio moves one-for-one with the saving-to-output ratio, suggesting international capital mobility. Design/methodology/approach - The paper uses the econometric framework developed by Fisher and Seater, interpreting the Feldstein-Horioka hypothesis as a long-run phenomenon, and paying particular attention to the integration properties of the data, since meaningful tests critically depend on these properties. The paper also investigates the power of the long-horizon regression tests, using the inverse power function of Andrews. Findings - The paper tests the Feldstein-Horioka hypothesis for 15 European countries, as well as for the USA and Japan, using annual data for the period from 1960 to 2002. Evidence is found against the Feldstein and Horioka hypothesis of low international capital mobility. Originality/value - Although the findings are in contrast to those of Feldstein and Horioka, they are consistent with neoclassical growth theory according to which there is no reason to expect a relation between saving and investment if there are no barriers to capital movements. [ABSTRACT FROM AUTHOR]

Purpose: In the context of debate on competitive devaluation and trade imbalances, the purpose of this paper is to investigate the role of exchange rate misalignment as a determinant of trade imbalances in selected major trade surplus (Germany, China, Japan, Russia and KSA) and major trade deficit countries (USA, UK, France, India and Turkey). Design/methodology/approach: The authors used a structural vector auto-regressive model on data from ten countries with the highest trade deficit and surplus. The period of analysis is from 2000 Q1 to 2016 Q1. Findings: The key findings suggest that although exchange rate misalignment from equilibrium may have some implications for the current account balance for surplus and deficit countries, the effects observed were rather very mild and transitory. There was a heterogeneity in the response of the current account position to exchange rate misalignment in each country, concomitantly; the exchange rate misalignment shall not be seen as the sole responsible factor in the debate on global trade imbalances. Research limitations/implications: The research has profound implications in terms of exploring the notion of competitive devaluation and exchange rate misalignment as a cause of major global trade imbalances. Practical implications: This study has important practical implications for the trade policy of major economies in the world. These are twofold. First, this study has analysed and reported on the degree of misalignment of exchange from its equilibrium values in the major trade surplus and deficit countries. Second, it has investigated the implications of any misalignment for the trade balance or respective economies. Social implications: There are important social implications as the notion of competitive devaluation and exchange rate–trade balance nexus has been heavily politicised. This study provides an empirical insight and an answer to these claims which have social and political implications. Originality/value: There is a significant element of originality and contribution to the existing body of knowledge on the subject. In the context of debate on competitive devaluation this is the first study which has investigated whether the exchange rate has been misaligned from its equilibrium values (competitive devaluation) and whether there is some nexus between the real exchange rate misalignment and trade imbalances in under-analysis economies. [ABSTRACT FROM AUTHOR]

Purpose The purpose of this paper is to analyse the implications of exchange rate depreciation for inflation targeting and trade balance of UK in the context of the Brexit epoch.Design/methodology/approach The study employed a time-varying structural vector auto-regression (TVSVAR) model framework in which the sources of time variation were both the coefficients and variance-covariance matrix of the innovations on the data from January 1989 to September 2016.Findings The findings suggest that the depreciation of the Stirling has significant effects on inflation and trade balance in UK in context of Brexit epoch. It also showed that such a depreciation can be helpful in the improvement of external balance as well as steering the inflation to its statutory target. Despite, the inflation targeting, there is strong evidence of a pass-through.Research limitations/implications Research has profound implications in terms of the sharp depreciation of GBP associated with the Brexit outcome. The study is very topical and could be very interesting to the readership of JES as well as wider audience. The study has limitations in a context that the significance of the results and association of the under analysis entities is contingent on the future trade relationships and Channel between UK and EU. Therefore, although there is a lot of uncertainty about the future of Britain trade relationships, this study provides guidance on the importance of exchange rate channel if the similar trade arrangements prevails in the post-Brexit era.Practical implications The research has profound practical implications, using a TVSVAR model in which the relationship among the entities varies over time; it has shown the importance of exchange rate in terms of external balance and inflation targeting. Hence, it has appeal for the practitioners as well as academics.Social implications The research has great social implications. The Brexit is the biggest political and economic event of this era for UK and EU. There are big questions about the relationship between UK and EU in the post-Brexit epoch as well as questions about the future of the European integration. In this context, this study has shown that how the exchange rate could play an important role for the UK economy when its contemporary trade channels prevail. Concomitantly, it has social implications particularly for the European society.Originality/value The research is an original piece of work. It has contributed to the debate on the exchange rate deprecation, external balance and inflation targeting in context of the Brexit associated sharp depreciation of Stirling. It has used a framework, i.e. TVSVAR, which also have unique features in terms of testing the associations among under analysis entities against time. [ABSTRACT FROM AUTHOR]

Students of balance of payments theory are undoubtedly familiar with the various discussions concerning the use of monetary-fiscal policies to attain internal and external balance. The seminal contributions to this particular branch of balance of payments theory are commonly associated with R.A. Mundell [1960, 1961, 1962, 1963], though it might be noted, in passing, that the problem had received attention even earlier from W.M.Corden [1960], T.W. Swan [1955], and others. Mundell's efforts, in turn, stimulated during the 1960's a considerable body of literature on the subject, a representative sample of which includes contributions by Fleming [1962], H.G. Johnson [1966], Krueger [1967], Levin [1968], Ott and Ott [1968], and Sohmen [1967]. That the subject continues to command interest is evidenced by such recent papers as those of Argy [1971], Fausten [1971], Leighton [1970], Wrightsman [1970], and Zelder, Ross, and Collery [1972]. Moreover, it is quite apparent that this interest is further reinforced by the current preoccupation with the implications of the proposed European monetary unification for the domestic policies of the individual EEC countries. [ABSTRACT FROM AUTHOR]

Argues that the international monetary system should provide for as much automatic flexibility as possible in order to minimize the excuse provided by balance of payments disequilibra for interventions in international trade and payments. Problem of improving the mechanism of adjustment; Historical perspective on the adjustment problem in light of the liquidity problem.

Purpose - Despite a growing interest in research, no existing study explores the nature of, and the relationship between, the real exchange rate and trade imbalance between Taiwan and China. These economies were admitted to the World Trade Organization in late 2001 (China) and in January 2002 (Taiwan). This study aims to redress this deficiency. Design/methodology/approach - Using Johansen's cointegration approach and bilateral trade data, the study reveals overwhelming evidence of a stable long-run relationship of the real exchange rate and bilateral trade balance between Taiwan and its trading partners: China, the USA, Japan, Korea, Hong Kong and Singapore. Findings - The evidence indicates that the currency depreciation of the New Taiwan dollar improves Taiwan's bilateral trade balance, except with China. Originality/value - The findings imply that Taiwan cannot resolve the cross-Strait trade imbalance alone via the currency depreciation, and macroeconomic adjustments, including application of the WTO rules, currency exchange and imports of Chinese goods, need to be negotiated on both sides of the Taiwan Strait. [ABSTRACT FROM AUTHOR]

Purpose - To avoid aggregation bias by using trade data at bilateral level so that we can determine how sensitive are Britain's inpayments and outpayments to the value of the British pound. Design/methodology/approach - The method is based on the bounds testing approach to cointegration and error-correction modeling. Findings - The main finding is that while UK inpayments are not sensitive to the exchange rate, her outpayments are. Research limitations/implications - Future research must concentrate on disaggregating data further, perhaps at commodity level. Practical implications - The results could be used to identify Britain's trading partners against which Britain can devalue the pound and improve her trade balance. Originality/value - No study has attempted to test the impact of real depreciation of the pound on Britain's payments and receipts with her major trading partners. [ABSTRACT FROM AUTHOR]

The impact of currency devaluation on the status of the balance of payments has received considerable attention on both theoretical and empirical grounds during the last two decades. A generally accepted conclusion in the literature is that a currency devaluation will improve the balance of payments provided that the Marshall-Lerner condition is satisfied. Most literature concerning the effect of exchange-rate adjustment on the status of the overall balance of payments is focused on examining the effect of an unanticipated currency devaluation. Very few efforts seem to have been made to analyse the impact of anticipated currency devaluation in the economy. This article thus attempts to study the resultant status of the balance of payments if a self-fulfilling expectation is made by the public today in anticipation that the domestic currency will be devalued at a future specific date. As a first approximation, this issue has an important implication for Taiwan. Following a substantial surplus in the balance of payments and as a result of the pressure imposed by the US Government, the public in Taiwan now universally anticipate that the local currency will appreciate at a future time. [ABSTRACT FROM AUTHOR]

Discusses the importance of stability of velocity to any policy discipline based on the monetary theory of the balance of payments. Empirical studies of developing countries that confirm the constancy of velocity; Definition of the velocity of money as the ratio of nominal income to the money stock.

Discusses the basic problems of interpretation for internal and external balance in economics. Basic meanings of the terms 'internal balance' and 'external balance'; Implications for research in the theory of policy making; Policy targets for each type.

Discusses several schools of thought relating to balance of payments theory. Use of a model to illustrate the common ground in the various approaches to the theory of balanced payments; Implications of each model for balance of payments adjustment; Regime of fixed, but adjustable, exchange rates.