Interest Rate, Exchange Rate, Terms of Trade and Current Account Dynamics: Empirical Evidence from Pakistan

Abstract

Since the early 1980s, the intertemporal approach to the current
account (ICA) has acquired much attention and has become a
standard instrument for determining the current account
situation. The current study analyzes the ICA’s consistency and
relevance for Pakistan. To achieve this goal, we employ the
present value model of the current account for the period 1960 to
2016. The empirical findings highlight the statistical consistency
of the prediction of the intertemporal model in Pakistan.
Furthermore, when supplemented with external sector variables
such as the stochastic global interest rate, real exchange rate, and
terms of trade, the present value model does a reasonable job of
illuminating Pakistan’s historical current account movements.