Asian current account balances and spillovers from a foreign country, a region and the United States

This paper provides an overall picture on the influence of domestic and foreign shocks on the current account of selected Asian countries over the period 1978 to 2012. The present value model of the current account theory states that forward looking and consumption smoothing behaviour of economic agents can promote sustainable current account balances, as long as these are maintained by transitory unanticipated shocks to the current account. The unexpected transitory domestic and foreign shocks are sourced, respectively, from the domestic and foreign current account. Foreign shocks are developed from an Asian country, a region, and the US. Our empirical analysis of the impact of foreign and domestic current account shocks shows that unexpected domestic shocks, rather than unexpected foreign shocks, matter for the current accounts of Asian countries.