Current account deficit sustainability: the case of Barbados

Abstract

This article investigates the sustainability of the current account deficit in Barbados over the period 1960 to 2006. Various unit root and cointegration techniques are employed to determine whether the country is satisfying its Intertemporal Budget Constraint (IBC). The cointegration regressions suggest that the current account of Barbados is sustainable and that deviations from long-run equilibrium between real exports and imports are corrected in the short-run with imports making the adjustment.

Notes

¹ Other notable studies include Wickens and Uctum (1993); Milesi-Ferretti and Razin (1996); Cashin and McDermott (1998); Fountas and Wu (1999); Apergis et al. (2000); Irandoust and Sjoo (2000); Arize (2002); Mann (2002) and Baharumshah et al. (2003).

² See Johansen and Juselius (1990), Phillips (1991) and Gonzalo (1994) for a further discussions on the advantages of the Johansen procedure.

³ Gregory and Hansen (1996) propose a test for cointegration in the presence of structural breaks by allowing for a level shift, or a shift in both the level and slope. However, it appears that the results depend on the normalization chosen, and seasonal and short-run dynamics are neglected.

⁴ This is done using MALCOM 2.9 (available from www.greta.it/malcom/index_malcom.htm).

⁵ See Ahmed and Rogers (1995, p. 361) for further discussion.

⁶ See Campos et al. (2005) for a detailed exposition on the general-to-specific approach to econometric modelling.

⁷ See Greenidge et al. (2006) for an exposition of this procedure as it relates to the sustainability of fiscal deficit.

⁸ These are mainly controls on foreign currency accounts, purchase and sale of real estate, and some categories of cross-border borrowing and lending, in the spirit of Article 43 of the Treaty of Chaguaramus, which allows member countries to impose certain restrictions to protect their balance of payments. Controls are also in place with respect to participation in securities issued by regional governments principally because of the size of these issues and their likely impact on financial stability.

⁹ CARICOM refers to the Caribbean Community and Common Market and was established by the Treaty of Chaguaramas on 1 August 1973. The community comprises 15 full members: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago; and five associate members, Anguilla, Bermuda, British Virgin Islands, Cayman Islands and the Turks and Caicos Islands.