Macroeconomic, institutional and financial determinants of current account deficit in North Macedonia: Evidence from time series

Abstract

The role of current account balances in macroeconomic policy is progressively high, especially in transition countries. Using yearly level data for a 1994-2022 period, based on co-integration analysis, this research empirically investigates the macroeconomic, institutional, and financial determinants of the current account deficit in North Macedonia. The results of the study reveal that a country’s current account deficit is significantly affected by domestic demand factors like real effective exchange rate, output gap, and trade openness, the fiscal-related factor of gross debt position, the institutional-related factor of economic freedom, legal and property rights, regulatory index, control of corruption, government effectiveness, as well as financial development captured by money supply. The study also finds out that the country has recorded more deficit in the current account than potentially expected during two time periods, the pre-financial crisis period 2001-2008 and during the COVID-19 crisis period 2019-2022.