The current account-interest rate relation: A panel data study for OECD countries

The issue of the current account is important for policy makers, since it provides information about quantity of foreign resources that must be borrowed to fund domestic investment. This study examines the relationship between current account balance as a percentage of GDP and real interest rate over the period from 1980-2009 for a sample of 21 OECD countries that are high income economies using recent developed panel estimation techniques. The two-way panel estimation technique is used in order to investigate the relationship between the selected variables. The two-way Panel OLS estimation results show that there is a positive relationship between current account and real interest rate as expected. This finding illustrates the fundamental understanding of the role of real interest rate in determining the current account balance for high income economies, and it is useful for policy considerations. From policy perspective, we can say that the authorities can overcome current account imbalances by altering interest rates.