eThesis - School of Business electronic theses

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China's continuing high current account surplus during the last ten years has attracted worldwide attention. This paper aims to investigate whether China's current account surplus is reasonable based on the inter-temporal current account model, and whether GDP growth rate of China, world real interest rate, and real exchange rate of Chinese Yuan have significant effects on China's current account balance, and if it is the case, how they affect China's current account behavior.

To solve my research questions, I chose the inter-temporal current account model as the theoretical model and Vector Autoregression (VAR) model as the econometric model. Two datasets: annual dataset (1980-2013) and quarterly dataset (1994Q1-2014Q2) have been collected, and each dataset has three time series including the change of net output, current account and consumption-based real interest rate. All the time series are stationary in both Dickey-Fuller (ADF) unit root and Phillips-Perron unit root test, except that in ADF test results consumption-based real interest rate is not stationary in all different lags.

Adequate VAR model performs fairy well. VAR estimation shows that the change of net output and consumption-based real interest rate have significant effects on current account; impulse response analysis results show that consumption-based real interest rate has more sustained effects on current account compared with the change of net output, though they have similar strong cumulative effects on current account which converge to a positive constant in the long term.

Present value test results reject the theoretical model. Therefore it is difficult to determine whether China's current account surplus is reasonable merely based on the inter-temporal model. Nevertheless, combining the recent research results and China's economy itself, one can conclude that China needs a current account surplus and substantial international reserves to help maintain the stability of development of domestic capital market and ensure the success of joining into the world economy in its gradual opening process.