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Present Value Tests of the Current Account with Durables Consumption

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  • Talan Iscan

    ()
    (Department of Economics, Dalhousie University)

Abstract

The present value tests of intertemporal model of the current account usually assume that all goods are traded and that aggregate consumption decisions can be closely approximated by a random walk process. This paper extends these models by explicitly introducing durables and nontraded goods into an intertemporal model of the current account, and tests the model using Canadian data. Since aggregate consumption expenditures on durables do not exhibit random walk behaviour even when the aggregate consumer has a quadratic utility function, the model that includes durables makes predictions that differ from those of the basic approach. When nontraded goods are also incorporated into the model, the most appropriate income variable becomes output net of nontraded production. These implications are examined using present value tests. The results suggest that introduction of both durables and nontraded goods improves upon the model with (traded) nondurables only. This seems to be due to the combination of durables and nontraded goods, as durables alone do not sufficiently refine the basic model.

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Bibliographic Info

Paper provided by Dalhousie, Department of Economics in its series Department of Economics at Dalhousie University working papers archive with number present.

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Length: 32 pages
Date of creation: 07 Jun 1999
Date of revision:
Handle: RePEc:dal:wparch:present

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Keywords: current account; durables; traded and nontraded goods; Canada;

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References

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Citations

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Cited by:
  1. Sun, Lixing, 2004. "Measuring time-varying capital mobility in East Asia," China Economic Review, Elsevier, vol. 15(3), pages 281-291.
  2. José M. Campa & Ángel Gavilán, 2006. "Current accounts in the euro area: An intertemporal approach," Banco de Espa�a Working Papers 0638, Banco de Espa�a.
  3. Ahmad Zubaidi Baharumshah & Hamizun Bin Ismail, 2012. "The present value model and Thailand's current account balance," Journal of Economic Studies, Emerald Group Publishing, vol. 39(3), pages 337-355, December.
  4. Chen Kuo, 2013. "Is the liberalization policy effective on improving bivariate cointegration of current accounts, foreign exchange, stock prices? Further evidence from Asian markets," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(4), pages 1923-1941, June.
  5. Freund, Caroline, 2005. "Current account adjustment in industrial countries," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1278-1298, December.
  6. Huang, Chao-Hsi, 2010. "International capital mobility: An alternative test based on intertemporal current account models," International Review of Economics & Finance, Elsevier, vol. 19(3), pages 467-482, June.
  7. Braeu, Rebecca, 2010. "Consumption tilting and the current account: Evidence from Canada," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 304-312, April.
  8. Kitamura, Yoshihiro, 2009. "The current account and stock returns," Research in International Business and Finance, Elsevier, vol. 23(3), pages 302-321, September.
  9. Gruber, Joseph W., 2004. "A present value test of habits and the current account," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1495-1507, October.
  10. Campa, Jose Manuel & Gavilan, Angel, 2011. "Current accounts in the euro area: An intertemporal approach," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 205-228, February.

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