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The Current Account and the Interest Differential in Canada

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Author Info
Martin Boileau
Michel Normandin

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Abstract

For post-1975 Canadian data, we document the joint behavior of output, the current account, and the interest differential at the business cycle frequency. We also interpret the joint behavior using a simple small open economy model. Our simple model assumes that agents have access to world international financial markets, but face country-specific interest rate on their holdings of world assets. The interest differential depends negatively on the country's net foreign asset position. We find that our simple model matches the Canadian data remarkably well.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0424.

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Date of creation: 2004
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Handle: RePEc:lvl:lacicr:0424

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Related research
Keywords: International Real Business Cycle; Small Open Economy; Habit Formation;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
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  1. Michel Normandin & Martin Boileau, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 03-05, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
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  2. Devereux, Michael B. & Gregory, Allan W. & Smith, Gregor W., 1992. "Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 3-16, February. [Downloadable!] (restricted)
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  3. Normandin, Michel, 1999. "Budget deficit persistence and the twin deficits hypothesis," Journal of International Economics, Elsevier, vol. 49(1), pages 171-193, October. [Downloadable!] (restricted)
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  4. Alan M. Taylor, 2002. "A Century of Current Account Dynamics," NBER Working Papers 8927, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Barro, R.J. & Martin, X.S., 1990. "World Real Interest Rates," RCER Working Papers 227, University of Rochester - Center for Economic Research (RCER).
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  6. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June. [Downloadable!] (restricted)
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  7. Michael B. Devereux & Gregor W. Smith, 2005. "Transfer Problem Dynamics: Macroeconomics of the Franco-Prussian War Indemnity," Working Papers 1025, Queen's University, Department of Economics. [Downloadable!]
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  8. Marc-André Letendre, 2004. "Capital utilization and habit formation in a small open economy model," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 721-741, August. [Downloadable!] (restricted)
  9. A. Senhadji Semlali, 1997. "Sources of Debt Accumulation in a Small Open Economy," IMF Working Papers 97/146, International Monetary Fund.
  10. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
  12. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
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  13. Correia, I. & Rabelo, S. & Naves, J.C., 1994. "Business Cycles in a Small Open Economy," RCER Working Papers 382, University of Rochester - Center for Economic Research (RCER).
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  14. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February. [Downloadable!] (restricted)
  15. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Springer, vol. 20(1-2), pages 87-116, October. [Downloadable!]
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  16. 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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  17. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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  18. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
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