Modeling Current Account Balance and General Government Net Lending and Borrowing and GDP Growth

In this study we endeavored to model Gross Domestic Product (GDP) growth rate as a function of general government net lending and borrowing, current account balance, inflation rate, and unemployment rate for four developed countries in the world -United Kingdom, United States, Canada, and France. We have controlled the purchasing power parity GDP in international dollar in our model specification. Our attention in this paper is to show the causal effect of general government net lending and borrowing and current account balance on GDP growth rate for the four countries for a 40-year period, 1980-2020. In this panel data analysis, we find that general government net lending and borrowing is having a positive effect when government lends more to the other sector of the economy and nonresidents and borrow less from the same. We also find that the current account balance has a nonsignificant negative effect on GDP growth rate in fixed effect model. Although, this effect sign and magnitude is almost identical to fixed effect model, however, it is significant in the random effect model.

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