Intertemporal approach to the current account balance, a case study of Uganda

Abstract

Uganda’s current account balance has persisted on the deficit side since the early 2000s. Recent trends have shown that the size of this deficit has increased, making it a call for concern to policy makers. This study examines the applicability of the intertemporal approach to the current account balance in explaining the movements in Uganda’s current account. The study uses secondary annual time-series data from 1982 to 2019, obtained from of the World Development Indicators (WDI) database of the World Bank. The study commenced the analysis by performing Unit root test (including structural break unit root) to establish the order of integration of the study variables. Based on the order of integration of the study variables and the theoretical underpinnings, the study estimated a Vector Autoregressive model with a single lag. The unit root test results indicate that all variables are stationary at first difference and the current account balance was on an unsustainable path. Furthermore, the study also provides evidence that the intertemporal approach explained the movement in Uganda’s current account balance. The study therefore recommends applying the intertemporal approach when looking at the current account balance.