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Dynamics of the current account and interest differentials

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  • Boileau, Martin
  • Normandin, Michel

Abstract

In contrast to earlier work, we study the relation between the current account and interest rate differentials. To do so, we document the relation for international data. We then interpret this relation from a two-country, dynamic, general equilibrium environment. We finally confront the relation predicted by the environment to the relation observed in the data. We find that the environment correctly predicts that the current account is countercyclical; that the interest differential is procyclical; and that the current account is negatively correlated with current and future interest differentials, but positively correlated with past interest differentials.

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Bibliographic Info

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

Volume (Year): 74 (2008)
Issue (Month): 1 (January)
Pages: 35-52

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Handle: RePEc:eee:inecon:v:74:y:2008:i:1:p:35-52

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Web page: http://www.elsevier.com/locate/inca/505552

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Cited by:
  1. Joseph W. Gruber & Steven B. Kamin, 2008. "Do differences in financial development explain the global pattern of current account imbalances?," International Finance Discussion Papers 923, Board of Governors of the Federal Reserve System (U.S.).
  2. Michel Normandin & Bruno Powo Fosso, 2006. "Global versus Country-Specific Shocks and International Business Cycles," Cahiers de recherche 0601, CIRPEE.
  3. Michel Normandin & Martin Boileau, 2004. "The Current Account and the Interest Differential In Canada," Cahiers de recherche 04-09, HEC Montréal, Institut d'économie appliquée.
  4. Demirel, Ufuk Devrim, 2010. "Macroeconomic stabilization in developing economies: Are optimal policies procyclical?," European Economic Review, Elsevier, vol. 54(3), pages 409-428, April.
  5. Alok Johri & Marc-Andre Letendre & Daqing Luo, 2011. "Organizational Capital and the International Co-movement of Investment," Department of Economics Working Papers 2011-03, McMaster University.
  6. Michel Normandin & Martin Boileau, 2005. "Closing International Real Business Cycle Models with Restricted Financial Markets," Cahiers de recherche 05-03, HEC Montréal, Institut d'économie appliquée.

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