Are Current Account Deficits Sustainable?

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Vol. 6, 2012-46 | November 29, 2012 | http://dx.doi.org/10.5018/economics-ejournal.ja.2012-46

Are Current Account Deficits Sustainable? New Evidence from Iran Using Bounds Testing Approach to Level Relationships Hassan Heidari
Urmia University

Salih Turan Katircioglu
Eastern Mediterranean University

Narmin Davoudi
Islamic Azad University Abstract This paper provides new evidence on the long-run relationship between exports and imports of the Iranian economy by employing bounds testing approach to level relationships. In Iran, there have been many unusual policy changes and/or external shocks to the economy; this has resulted in the occurrence of a multitude of structural breaks in macroeconomic variables. By taking these breaks into account, results of the present study reveal that there is a long-run equilibrium relationship between imports and exports over the sample period, 1960–2007. This result confirms the finding of Arize (Imports and exports in 50 countries: Tests of cointegration and structural breaks, 2002) by employing bounds tests to level relationships and suggests that current account deficits in Iran are sustainable. JEL C22, F10, F32 Keywords Current account; bounds test; Iran Correspondence Hassan Heidari, Department of Economics, Urmia University, Urmia, Iran; e-mail: h.heidari@urmia.ac.ir. Salih Turan Katircioglu, Department of Banking and Finance, Eastern Mediterranean University, North Cyprus, Turkey; e-mail: salihk@emu.edu.tr. Narmin Davoudi, Islamic Azad University, Mahabad Branch, Faculty of Management, Mahabad, Iran; e-mail: ndavudi@hotmail.com. Citation Hassan Heidari, Salih Turan Katircioglu, and Narmin Davoudi (2012). Are Current Account Deficits Sustainable? New Evidence from Iran Using Bounds Testing Approach to Level Relationships. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 6, 2012-46. http://dx.doi.org/10.5018/economics-ejournal.ja.2012-46 © Author(s) 2012. Licensed under a Creative Commons License - Attribution-NonCommercial 2.0 Germany

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Introduction

One of the long-standing distinguished topics in macroeconomics has been the sustainability of current accounts (see, e.g., Husted 1993; Bahmani-Oskooee 1994; Gould and Ruffin 1996; Fountas and Wu 1999; Arize 2002; Mann 2002; Baharumshah et al. 2003; Christopoulos and Leon-Ledesma 2010; among others), which occur when exports and imports converge to equilibrium in the long-term period. In that case, significant changes in the macroeconomic policy are not necessary. An unsustainable disequilibrium occurs when exports and imports do not converge in the long-term period, and leads to current account deficits. These deficits, in the long run, lead to an increase in interest payments, causing a large debt for future generations and, thus, a lower standard of living. Therefore, the investigation of whether imports and exports are in long-run equilibrium relationship is essential for the design and evaluation of current and future macroeconomic policies aimed at achieving a trade balance (Arize, 2002). An empirical investigation about the sustainability of current account deficits provides mixed results in the relevant literature. Some studies—such as Husted (1993) and Gould and Ruffin (1996), with US data; Bahmani-Oskooee (1994), with Australian data; Herzer and Nowak-Lehmannd (2005), with Chilean data; Cheong (2005), with Malaysian data; Kalyoncu (2005), with Turkish data; Hollauer and Mendonca (2006), with Brazilian data; Bineau (2007), with Bulgarian data; and Ramona and Razvan (2009), with Romanian data—found that exports and imports of these countries, in their period of study, converge in the long run. Moreover, Wu et al. (2001), by applying panel cointegration tests, support the sustainability of current account for G–7 countries. On the other hand, Founds and Wu (1999), with US data; Cheong (2005), with Malaysian data; and Verma and Perera (2008), with Sri Lanka’s data, have shown that the hypothesis of...
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