Impact of Domestic and Foreign Output Gaps and Exchange Rate Misalignment on Current Account Imbalances: Panel Evidence from Selected SAARC Economies
DOI:
https://doi.org/10.54938/ijemdss.2026.05.2.688Keywords:
Current account imbalance, Domestic and foreign output gap, Exchange rate misalignment, Common Correlated EffectAbstract
The study explores the relationships among the four macroeconomic imbalances, namely current imbalance, real exchange rate misalignment, domestic output gap, and foreign output gap for selected SAARC countries for the period 1990 to 2023. Having set a theoretical relationship of the said variables, based on both absorption approach to current account balances and elasticity approach to exports and imports, the study primarily employs a fixed effect model to establish empirical relationship among candidate variables. The empirical results suggest an inverse relation between current account with exchange rate misalignment and domestic output gap, while a positive relation with foreign output gap. To check the robustness of the model, Common Correlated Effect (CCE) model is applied yielding similar results. The findings have important policy implications.
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