Title: Country specific and world productivity shocks and current account: does the relationship hold in case of India and the G20 group?

Authors: Nikita Patial

Addresses: Indian Institute of Foreign Trade, Block-II, B-21, NRPC Colony, Qutab Institutional Area, New Delhi, Delhi 110016, India

Abstract: Intertemporal approach to current account became a fashionable tool in last few decades to study the lending and borrowing decisions of an economy in the international markets. Following, Glick and Rogoff (1995) theoretical model, this study empirically examines the link between India's current account and its country specific productivity shocks using dynamic factor analysis approach to segregate world and country specific shocks. Our results suggest that India's current account movements are independent of its country specific productivity shocks as opposed to the theory. The mean reverting nature of country specific shocks leads to consumption smoothing by agents, increasing savings in the economy, which offsets any impact of rise in investment. We also extend our analysis to a panel of G20 countries. This study reiterates the potential of intertemporal models to replace the enhanced versions of Mundell Fleming IS-LM framework in analysing key macroeconomic issues by banks, and other international institutions.

Keywords: current account; productivity shocks; country specific productivity; global shock; G20 countries; investment; dynamic factor analysis; DFA.

DOI: 10.1504/IJEPEE.2025.148191

International Journal of Economic Policy in Emerging Economies, 2025 Vol.22 No.2, pp.113 - 139

Received: 18 Jan 2021
Accepted: 20 Sep 2021
Published online: 29 Aug 2025 *

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