The Theory of current accounts and the developing world: An Exploratory empirical analysis

Abstract

The question of the determinants of the current account has received enormous attention and has spawned an entire generation of papers for the industrialised countries [3]. However, the explanatory power of the theories put forward in explanation of the CA behaviour have been, at best, weak. There has, been very little work on the CA behaviour of developing countries, insofar as empirical evaluation of the competing theories are concerned. In this pa- per, an attempt has been made to explain the CA behaviour of the developing countries in a framework developed and evaluated for the advanced industrialised countries. Preliminary results indicate that these models do not possess any significant degree of explanatory power and are not suited, in their current form, to analyse the CA behaviour of the developing world. The surmise is that government consumption as well as differing institutions, tastes and other factors affect these countries differently and any model that does not,explicitly, account for these disparities is unlikely to have significant explanatory power.