The Structural Relationship between Current and Capital Account Balance in India: A Time Series Analysis

Debashis Chakraborty (), Jaydeep Mukherjee () and Tanaya Sinha

MPRA Paper from University Library of Munich, Germany

Abstract: The long run relationship between current account balance (CAB) and capital account balance (KAB) and the repercussions of capital account convertibility (KAC) on growth process of a country is a much debated issue. In particular, in the aftermath of the Southeast Asian crisis, the limitation of the liberal capital regime for a developing country like India is often highlighted in the literature. However, the probable impact of introducing KAC on CAB in India generally is discussed theoretically. Though some of the existing studies in India have earlier focused on this research question, they have done so by exogenously assuming the existence of a single structural break in the interrelationship between CAB and KAB. The present study intends to bridge the gap in the literature by raising two empirical questions: first, how far KAC is likely to destabilize the CAB and second, measuring the strength of the interrelationship between CAB and KAB. The current paper also contributes to the literature by incorporating multiple endogenous structural breaks in the empirical analysis. The empirical findings do not support any long term relationship between capital and current account balance and reveals that two significant structural breaks are observed in 1993-94 and 2003-04.

Keywords: International Capital Movements; Foreign Exchange; Current Account Adjustment (search for similar items in EconPapers)
JEL-codes: F21 F31 F32 (search for similar items in EconPapers)
Date: 2010-05-20
New Economics Papers: this item is included in nep-cwa, nep-opm and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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