WAEMU Trade and Current Account Balance Deficit Analysis: A Panel VAR Approach

Abstract

Our study focuses on the analysis of the main determinants which have an effect on trade and current account balance. We empirically investigate the effect of money supply (M2), real exchange rate, income, inflation, investment, and house-hold consumption expenditure on the trade and current account balance of WAEMU for the period 1980-2013. The examination of monetary and absorption approaches to the balance of payments motivate the inclusion of income and money supply (M2). The conventional approach of elasticity motivates usage of exchange rates. We adopt the panel VAR method which additionally includes a simulation of variance decompositions and impulse response functions for transmission of shocks and further deductions. The study found a negative and statistically significant effect of money supply, household consumption expenditure on trade Balance. We found also a significant and positive effect of real exchange rate, income, inflation, and investment on the trade balance. A significant and negative relationship between money supply, investment and current account balance was established. The effect of real exchange rate, income, inflation, and household consumption expenditure on the current account balance was found to be positive and significant as well. The significance of exchange rate effect on the trade balance suggests that the Marshall-Lerner condition hold for WAEMU.

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