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Understanding the New Zealand current account: A structural approach

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Author Info
Anella Munro
Rishab Sethi (Reserve Bank of New Zealand)

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Abstract

In this paper we use a small open economy model to identify the causal factors that drive New Zealand's current account. The model features nonseparable preferences, habit in consumption, imperfect capital mobility, permanent productivity shocks, fiscal shocks and two foreign shocks to explore features that are important in understanding the dynamics of the current account. The results suggest that permanent technology shocks and world cost of capital shocks account for the bulk of variation in the current account at short horizons; at longer horizons, external valuation shocks (reflecting terms of trade and exchange rate developments) account for most of the variance. Habit in consumption and a debt-sensitive risk premium are features that improve overall model it as measured by posterior odds ratios. These features, and the contribution of foreign and permanent technology shocks, help to explain why the one shock present value model of the current account fails to appropriately characterise the dynamics of the New Zealand current account, as discussed in Munro and Sethi (2006).

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2007/10.

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Length: 37 p.
Date of creation: Jul 2007
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Handle: RePEc:nzb:nzbdps:2007/10

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer, vol. 20(1-2), pages 1-20, October. [Downloadable!]
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  2. Nason, James M. & Rogers, John H., 2006. "The present-value model of the current account has been rejected: Round up the usual suspects," Journal of International Economics, Elsevier, vol. 68(1), pages 159-187, January. [Downloadable!] (restricted)
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  3. Alan Bollard, 2005. "Imbalances in the New Zealand Economy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, December. [Downloadable!]
  4. Ana Maria Santacreu, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2005/04, Reserve Bank of New Zealand. [Downloadable!]
  5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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  6. Kim, Kunhong & Hall, Viv B. & Buckle, Robert A., 2006. "Consumption-smoothing in a small, cyclically volatile open economy: Evidence from New Zealand," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1277-1295, December. [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. Juan Pablo Medina & Anella Munro & Claudio Soto, 2007. "What Drives the Current Account in Commodity Exporting Countries? The Cases of Chile and New Zealand," Working Papers Central Bank of Chile 446, Central Bank of Chile. [Downloadable!]
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