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New Zealand's Current Account Deficit: Analysis based on the Intertemporal Optimisation Approach

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Author Info
Kunhong Kim
Viv B Hall
Robert A Buckle () (School of Economics and Finance, Victoria University (Kim and Hall), New Zealand Treasury (Robert Buckle))

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Abstract

New Zealand's Current Account of the Balance of Payments has been persistently in deficit since the early 1970s and increased markedly during the late 1990s. Is this a cause for significant concern? This paper tackles this question by evaluating New Zealand's external solvency, the degree of optimality of the intertemporal consumption smoothing through its current account, and whether its international financial capital flows have been used in an optimal (consumption-smoothing) fashion. We carry out statistical tests in relation to external solvency. We also estimate a "benchmark" consumption-smoothing component for its current account based on an intertemporal optimisation model in order to carry out tests of the optimality of the size and volatility of the current account. We could not reject the hypotheses that New Zealand's current account was consistent with optimal smoothing, that the external solvency condition has been satisfied, and that there is "no excess volatility" in international financial capital flows.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2001/01-02/twp01-02.pdf
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Publisher Info
Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 01/02.

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Length: 25 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:nzt:nztwps:01/02

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Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz
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Related research
Keywords: current account; intertemporal; consumption-smoothing; New Zealand;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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. 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)
    Other versions:
  3. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Blackwell Publishing, vol. 31(59), pages 369-84, December.
  4. Atish R. Ghosh & Jonathan David Ostry, 1994. "Export Instability and the External Balance in Developing Countries," IMF Working Papers 94/8, International Monetary Fund.
  5. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, Oxford University Press, vol. 9(2), pages 305-33, May.
  6. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Oxford University Press, vol. 29(3), pages 429-45, July.
  7. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1996. "Persistent Current Account Deficits: A Warning Signal?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 161-81, July. [Downloadable!] (restricted)
  8. Bergin, Paul R & Sheffrin, Steven M, 2000. "Interest Rates, Exchange Rates and Present Value Models of the Current Account," Economic Journal, Royal Economic Society, vol. 110(463), pages 535-58, April. [Downloadable!] (restricted)
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  9. 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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  10. Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
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  11. Agenor, P.R. & Bismut, C. & Cashin, P. & McDermott, C.J., 1996. "Consumption Smoothing and the Current Account: Evidence for France, 1970-94," Department of Economics - Working Papers Series 518, The University of Melbourne.
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  12. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November. [Downloadable!] (restricted)
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  13. Sean Collins & Francisco Nadal De Simone & David Hargreaves, 1998. "The current account balance: an analysis of the issues," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, March. [Downloadable!]
  14. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  15. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January. [Downloadable!] (restricted)
  16. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Blackwell Publishing, vol. 84(2), pages 147-59.
  17. Paul Cashin & C. John McDermott, 1998. "International Capital Flows and National Creditworthiness-Do the Fundamental Things Apply as Time Goes By?," IMF Working Papers 98/172, International Monetary Fund.
  18. Agenor, Pierre-Richard & Bismut, Claude & Cashin, Paul & McDermott, C. John, 1999. "Consumption smoothing and the current account: evidence for France, 1970-1996," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 1-12, January. [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. Iris Claus & David Haugh & Grant Scobie & Jonas Tornquist, 2001. "Saving and growth in an open economy," Treasury Working Paper Series 01/32, New Zealand Treasury. [Downloadable!]
  2. Lau, Evan & Baharumshah, Ahmad Zubaidi & Habibullah, Muzafar Shah, 2007. "Accounting for the Current Account Behavior in ASEAN-5," MPRA Paper 1322, University Library of Munich, Germany. [Downloadable!]
  3. 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!]
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