This paper develops an intertemporal model of the current account that allows for variable interest rates and exchange rates. These additional variables are channels through which external shocks may influence the domestic current account. We test the restrictions imposed by the theory, using quarterly data from three small open economies. The paper finds that including the interest rate and exchange rte significantly improves the fit of the intertemporal model over what was found in previous studies. the augmented model produces a forecast that better matches the volatility of current account data and better explains historical episodes of current account imbalance.
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Paper provided by California Davis - Department of Economics in its series Department of Economics with number
97-22.
Length: Date of creation: Date of revision: Handle: RePEc:fth:caldec:97-22
Contact details of provider: Postal: University of California Davis - Department of Economics. One Shields Ave., California 95616-8578 Phone: (530) 752-0741 Fax: (530) 752-9382 Email: Web page: http://www.econ.ucdavis.edu/ More information through EDIRC
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