Are Current Account Deficits Sustainable? New Evidence from Iran Using Bounds Test Approach to Level Relationship

Abstract

This paper provides new evidence on the long-run relationship between exports and imports of the Iranian economy by employing bounds test approach to level relationship. In Iran, there have been many unusual policy changes and/or external shocks to the economy which resulted in the occurrence of multitude of structural breaks in macroeconomic variables. By taking these breaks into account, the results of the present study reveal that there is long run equilibrium relationship between imports and exports over the sample period, 1960-2007. This result confirms the finding of Arize (Imports and Exports in 50 Countries: Tests of Cointegration and Structural Breaks, 2002) by employing bounds tests to level relationship and suggests that current account deficits in Iran are sustainable.

Keywords: Exports, imports, current account, bounds test, Iran

JEL Classification: C22, F10, F32