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Theoretical and Applied Economics
No. 4 / 2016 (609), Winter

Current account sustainability in SAARC economies: Evidence from combined cointegration approach

Manoranjan SAHOO
Indian Institute of Technology Madras, India
M Suresh BABU
Indian Institute of Technology Madras, India
Umakant DASH
Indian Institute of Technology Madras, India

Abstract. Majority of the South Asian economies are experiencing continuous deficits in their current account along with high external borrowing. This may question the sustainability of their external obligation in the long run. Therefore, this study examines the long run sustainability of current account imbalances of Seven South Asian economies for the period 1980 to 2014. By applying the recently developed econometric methods, we found that the current account of Maldives and Sri Lanka is sustainable in the long run, while for the rest of the South Asian economies the current account is not sustainable. This results have important policy implications. In particular, the South Asian economies should increase their cooperation with each other in terms of trade and investment to minimize the external sector imbalances and to achieve an increasing growth momentum in the future.

Keywords: Current account deficit; Intertemporal budget constraint; Sustainability; South Asian Economies.

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