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The Behavior of the Current Account in Response to Unobservable and Observable Shocks

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  • Irandoust Manuchehr
  • Sjoo Boo
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    Abstract

    The intertemporal approach to the balance of payments states that non-stationary flows in the current account will cointegrate or cotrend, unless there are permanent productivity shocks or long-run policy distortions. This paper examines the dynamics of the current account for a small open economy, using data from Sweden. The results show borderline cointegration for the current account. Recursive estimates disclose that there is no stable tendency towards finding cointegration. Cointegration is found for the first part of the sample, but from 1990 the cointegration test performs badly until speculative attacks force Sweden to give up the peg of the krona in 1992. In terms of the intertemporal approach, policy could be creating the imbalance, solved with the depreciation in 1992, after which the external accounts gradually move back to long-run equilibrium. [F31, F32, F41]

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Economic Journal.

    Volume (Year): 14 (2000)
    Issue (Month): 4 ()
    Pages: 41-57

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    Handle: RePEc:taf:intecj:v:14:y:2000:i:4:p:41-57

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    1. Mohsen Bahmani-Oskooee & Hyun-Jae Rhee, 1997. "Are Imports and Exports of Korea Cointegrated?," International Economic Journal, Taylor & Francis Journals, vol. 11(1), pages 109-114.
    2. Bertola, Giuseppe & Drazen, Allan, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," CEPR Discussion Papers 599, C.E.P.R. Discussion Papers.
    3. Elliott, Graham & Fatás, Antonio, 1995. "International Business Cycles and the Dynamics of the Current Account," CEPR Discussion Papers 1280, C.E.P.R. Discussion Papers.
    4. Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.).
    5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    7. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
    8. Lawrence H. Summers, 1986. "Tax Policy and International Competitiveness," NBER Working Papers 2007, National Bureau of Economic Research, Inc.
    9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, Octomber.
    10. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
    11. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
    12. Juselius, Katarina, 1998. "A Structured VAR for Denmark under Changing Monetary Regimes," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 400-411, October.
    13. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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    Cited by:
    1. KONYA, Laszlo & SINGH, Jai Pal, 2008. "Are Indian Exports And Imports Cointegrated?," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(2), pages 177-186.
    2. László Kónya, 2009. "The sustainability of the current account in the Czech Republic, Hungary and Slovenia," Empirical Economics, Springer, vol. 36(2), pages 367-384, May.
    3. Hamizun Ismail & Ahmad Baharumshah, 2008. "Malaysia’s current account deficits: an intertemporal optimization perspective," Empirical Economics, Springer, vol. 35(3), pages 569-590, November.
    4. Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2013. "Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach," Working Papers 1303, Department of Applied Economics II, Universidad de Valencia.
    5. Ahmad Zubaidi Baharumshah & Evan Lau, 2002. "On the Sustainability of Current Account Deficits: Evidence from Four ASEAN Countries," Working Papers 0062, National University of Ireland Galway, Department of Economics, revised 2002.
    6. Tomas del Barrio Castro & Mariam Camarero & Cecilio Tamarit, 2013. "An analysis of the trade balance for OECD countries using periodic integration and cointegration," Working Papers 1320, Department of Applied Economics II, Universidad de Valencia.
    7. Tomas del Barrio Castro & Mariam Camarero & Cecilio Tamarit, 2013. "The trade balance in euro countries: a natural case study of periodic integration with a changing mean," Working Papers 1321, Department of Applied Economics II, Universidad de Valencia.

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