Temporal causality and the dynamic interactions between terms of trade and current account deficits in co-integrated VAR processes: further evidence from Ivorian time series

Abstract

This paper investigates the relationship between the terms of trade and current account deficits within a context of VECM. The results indicate that for the Coted'Ivoire there is a long-run relationship between the terms of trade and current account deficits. They also indicate that current account deficits in Cote-d'Ivoire cannot be explained by the terms of trade. A strong unidirectional relationship exists between current account deficits and the terms of trade since the first one Granger causes the second. Finally, dynamic simulations have indicated that a significant portion of fluctuations in the terms of trade is explained by current account deficits. In light of these findings, it can be concluded that economic policy in Cote-d'Ivoire should be carried out with extreme caution due to the nature of international commodity markets, the mechanism of the terms of trade's formation, and the relative exogeneity of current account deficits.