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Futures Markets, Oil Prices and the Intertemporal Approach to the Current Account

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Author Info
Elif C. Arbatli
Abstract

The intertemporal approach to the current account suggests modeling movements in the current account in a forward-looking, dynamic framework. In this framework, the current account reflects consumption smoothing of agents that lend and borrow from the rest of the world in the face of transitory shocks to income. As in permanent income models of consumption, the marginal propensity to consume out of transitory shocks is predicted to be significantly smaller which implies that a permanent income shock has a smaller effect on the current account than a transitory income shock. I use the term structure of petroleum futures to identify permanent and transitory innovations to petroleum prices. Then, I formulate a test of the intertemporal approach to the current account based on how a group of nineteen small petroleum exporters respond to each type of income shock. This market-based identification of income shocks and their perceived persistence offers a transparent framework for investigating the empirical evidence for the intertemporal approach. As the theory predicts, petroleum exporters have a significantly higher marginal propensity to consume out of permanent oil price shocks than out of transitory oil price shocks.

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Paper provided by Bank of Canada in its series Working Papers with number 08-48.

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Length: 53 pages
Date of creation: 2008
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Handle: RePEc:bca:bocawp:08-48

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Related research
Keywords: Balance of payments and components;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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