Do macroeconomic fundamentals or external factors reflect current account behavior? Evidence from India

Abstract

This paper examines whether the macroeconomic fundamentals or external factors reflect India’s current account behavior in the post-liberalization period. Through an empirical model based on the intertemporal approach to the current account, we test a few hypotheses, viz. Twin-Deficit Hypothesis versus Ricardian equivalence, Feldstein-Horioka Hypothesis, among others. We employ structural break unit root testing and examine the behavior of the current account in the long-run, and the short-run using ARDL bound testing approach to cointegration. Additionally, we employ Dynamic OLS procedure for robustness checks. The results of our study further complement the previous studies on current account determinants in developed economies and fill a significant gap in an emerging market economy like India.