Advanced Search
MyIDEAS: Login to save this article or follow this journal

The present-value model of the current account has been rejected: Round up the usual suspects

Contents:

Author Info

  • Nason, James M.
  • Rogers, John H.

Abstract

Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the "usual suspects" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a "canonical" RBC model moves closest to the data when it features exogenous world real interest rate shocks.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V6D-4GK1GVT-1/2/1c3dd359ffe82b3ac93f794c72bb621a
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 68 (2006)
Issue (Month): 1 (January)
Pages: 159-187

as in new window
Handle: RePEc:eee:inecon:v:68:y:2006:i:1:p:159-187

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. John Geweke, 1999. "Computational Experiments and Reality," Computing in Economics and Finance 1999, Society for Computational Economics 401, Society for Computational Economics.
  2. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  3. Enrique G. Mendoza, 2001. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Working Papers 8338, National Bureau of Economic Research, Inc.
  4. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers, Rutgers University, Department of Economics 200115, Rutgers University, Department of Economics.
  5. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  6. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(1), pages 3-24, August.
  7. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  8. Bean, Charles R, 1986. "The Terms of Trade, Labour Supply and the Current Account," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 96(380a), pages 38-46, Supplemen.
  9. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
  10. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999, Society for Computational Economics 832, Society for Computational Economics.
  11. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  12. Ahmed, Shaghil, 1986. "Temporary and permanent government spending in an open economy: Some evidence for the United Kingdom," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(2), pages 197-224, March.
  13. Steven M. Sheffrin & Paul Bergin, 2003. "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Working Papers, University of California, Davis, Department of Economics 9722, University of California, Davis, Department of Economics.
  14. John Geweke, 1998. "Using simulation methods for Bayesian econometric models: inference, development, and communication," Staff Report, Federal Reserve Bank of Minneapolis 249, Federal Reserve Bank of Minneapolis.
  15. Enrique G. Mendoza, 1991. "Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 480-505, September.
  16. Diego Valderrama, 2002. "The impact of financial frictions on a small open economy: when current account borrowing hits a limit," Working Paper Series 2002-15, Federal Reserve Bank of San Francisco.
  17. Canova, Fabio, 1995. "Sensitivity Analysis and Model Evaluation in Simulated Dynamic General Equilibrium Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 477-501, May.
  18. Bergin, Paul R., 2003. "Putting the 'New Open Economy Macroeconomics' to a test," Journal of International Economics, Elsevier, Elsevier, vol. 60(1), pages 3-34, May.
  19. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  20. Stephanie Schmitt-Grohe, 1995. "The international transmission of economic fluctuations: effects of U. S. business cycles on the Canadian economy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-6, Board of Governors of the Federal Reserve System (U.S.).
  21. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June.
  22. Baxter, M. & Crucini, M.J., 1990. "Explaining Saving/Investment Correlation," RCER Working Papers 224, University of Rochester - Center for Economic Research (RCER).
  23. repec:fth:starer:8415 is not listed on IDEAS
  24. Ahmed, S. & Rogers, J.H., 1993. "Government Budget Deficits and Trade Deficits: Are Present Value Constraints Satisfied in Long-Term Data?," Papers, Pennsylvania State - Department of Economics 5-93-6, Pennsylvania State - Department of Economics.
  25. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers, Federal Reserve Bank of Minneapolis 426, Federal Reserve Bank of Minneapolis.
  26. Blankenau, William & Ayhan Kose, M. & Yi, Kei-Mu, 2001. "Can world real interest rates explain business cycles in a small open economy?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(6-7), pages 867-889, June.
  27. Fung, Ben & Mitnick, Scott & Remolona, Eli, 1999. "Uncovering Inflation Expectations and Risk Premiums From Internationally Integrated Financial Markets," Working Papers, Bank of Canada 99-6, Bank of Canada.
  28. James M. Nason & John H. Rogers, 1999. "Investment and the current account in the short run and the long run," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 647, Board of Governors of the Federal Reserve System (U.S.).
  29. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
  30. Otto, Glenn, 1992. "Testing a present-value model of the current account: Evidence from US and Canadian time series," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(5), pages 414-430, October.
  31. A. Senhadji Semlali, 1997. "Sources of Debt Accumulation in a Small Open Economy," IMF Working Papers 97/146, International Monetary Fund.
  32. Hercowitz, Zvi, 1986. "The real interest rate and aggregate supply," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(2), pages 121-145, September.
  33. Kevin Clinton, 1998. "Canada-U.S. long-term interest differentials in the 1990s," Bank of Canada Review, Bank of Canada, Bank of Canada, vol. 1998(Spring), pages 17-38.
  34. Mendoza, Enrique G & Tesar, Linda L, 1998. "The International Ramifications of Tax Reforms: Supply-Side Economics in a Global Economy," American Economic Review, American Economic Association, American Economic Association, vol. 88(1), pages 226-45, March.
  35. Jonathan David Ostry & Atish R. Ghosh, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
  36. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, Elsevier, vol. 29(3-4), pages 237-253, November.
  37. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters, in: The Economics of Information and Uncertainty, pages 1-46 National Bureau of Economic Research, Inc.
  38. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  39. Abdelhak S. Senhadji, 2003. "External Shocks and Debt Accumulation in a Small Open Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 207-239, January.
  40. DeJong, David N & Ingram, Beth Fisher & Whiteman, Charles H, 1996. "A Bayesian Approach to Calibration," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 14(1), pages 1-9, January.
  41. Zadrozny, Peter A., 1998. "An eigenvalue method of undetermined coefficients for solving linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(8-9), pages 1353-1373, August.
  42. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  43. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 797-818, September.
  44. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
  45. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(428), pages 107-28, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:68:y:2006:i:1:p:159-187. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.