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Challenging the Empirical Evidence from Present Value Models of the Current Account

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Author Info
Benoît Mercereau
Jacques Miniane

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Abstract

Under near-singularity conditions typically generated by persistence in current account data the predictions of present value models become extremely sensitive to small sample estimation error. Moreover, traditional Wald tests will distort the likelihood that the model is true. Using OECD data we find that: (i) the Wald test often leads to the wrong inference compared to a valid test; (ii) in all cases posterior distributions of the predicted series and associated correlation coefficients and variance ratios are very wide. In particular, one cannot draw any firm conclusion regarding excess current account volatility.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/106.

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Length: 29 pages
Date of creation: 12 Jul 2004
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Handle: RePEc:imf:imfwpa:04/106

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Keywords: Current account ; Economic models ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier. [Downloadable!] (restricted)
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  2. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November. [Downloadable!] (restricted)
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  3. Kenneth Kasa, 2000. "Testing present value models of the current account: a cautionary note," Working Papers in Applied Economic Theory 2000-12, Federal Reserve Bank of San Francisco.
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  4. Cashin, Paul & McDermott, C John, 1998. "Are Australia's Current Account Deficits Excessive?," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 346-61, December.
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  5. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April. [Downloadable!] (restricted)
  6. Timothy Callen & Paul Cashin, 2002. "Capital controls, capital flows and external crises: evidence from India," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 11(1), pages 77-98, March. [Downloadable!] (restricted)
  7. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: round up the usual suspects," International Finance Discussion Papers 760, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  8. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anella Munro & Rishab Sethi, 2006. "The Present Value Model and New Zealand’s Current Account," Reserve Bank of New Zealand Discussion Paper Series DP2006/12, Reserve Bank of New Zealand. [Downloadable!]
  2. José M. Campa & Ángel Gavilán, 2006. "Current accounts in the euro area: An intertemporal approach," Banco de España Working Papers 0638, Banco de España. [Downloadable!]
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  3. Neil Dias Karunaratne, 2008. "The Polemics and Empirics of the Sustainability of Australia’s Current Account Deficit - Revisited," Discussion Papers Series 364, School of Economics, University of Queensland, Australia. [Downloadable!]
  4. Sebastian Edwards, 2006. "External Imbalances in an Advanced, Commodity-Exporting Country: The Case of New Zealand," NBER Working Papers 12620, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Anthony Makin & Wei Zhang & Grant Scobie, 2008. "The Contribution of Foreign Borrowing to the New Zealand Economy," Treasury Working Paper Series 08/03, New Zealand Treasury. [Downloadable!]
  6. Michele Ca’ Zorzi & Michal Rubaszek, 2008. "On the empirical evidence of the intertemporal current account model for the euro area countries," Working Paper Series 895, European Central Bank. [Downloadable!]
  7. Ayla Ogus & Niloufer Sohrabji, 2008. "On the optimality and sustainability of Turkey’s current account," Empirical Economics, Springer, vol. 35(3), pages 543-568, November. [Downloadable!] (restricted)
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