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Dynamics of the Current Account and Interest Differentials

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  • Michel Normandin

    ()
    (IEA, HEC Montréal)

  • Martin Boileau

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

Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 03-05.

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Length: 38 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:iea:carech:0305

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Keywords: International Real Business Cycle;

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Citations

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Cited by:
  1. 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.
  2. Boileau, Martin & Normandin, Michel & Powo Fosso, Bruno, 2010. "Global versus country-specific shocks and international business cycles," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 1-16, March.
  3. Johri, Alok & Letendre, Marc-André & Luo, Daqing, 2011. "Organizational capital and the international co-movement of investment," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 511-523.
  4. 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.).
  5. Martin Boileau & Michel Normandin, 2004. "The Current Account and the Interest Differential in Canada," Cahiers de recherche 0424, CIRPEE.
  6. Demirel, Ufuk Devrim, 2010. "Macroeconomic stabilization in developing economies: Are optimal policies procyclical?," European Economic Review, Elsevier, vol. 54(3), pages 409-428, April.

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