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

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  • Kunhong Kim
  • Viv B Hall
  • Robert A Buckle

    ()
    (School of Economics and Finance, Victoria University (Kim and Hall)
    New Zealand Treasury (Robert Buckle))

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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Bibliographic 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;

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References

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
  2. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  3. Paul Bergin & Steven Sheffrin, . "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Department of Economics, California Davis - Department of Economics 97-22, California Davis - Department of Economics.
  4. Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(2), pages 206-23, May.
  5. Sheffrin, S.M. & Woo, W.T., 1989. "Present Value Tests Of An Intertemporal Model Of The Current Account," Papers, California Davis - Institute of Governmental Affairs 61, California Davis - Institute of Governmental Affairs.
  6. Atish R. Ghosh & Jonathan D. Ostry, 1994. "Export Instability and the External Balance in Developing Countries," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 41(2), pages 214-235, June.
  7. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 55(6), pages 1249-73, November.
  8. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1996. "Persistent Current Account Deficits: A Warning Signal?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 1(3), pages 161-81, July.
  9. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 29(3), pages 429-45, July.
  10. C. John McDermott & Paul Cashin, 1996. "Are Australia's Current Account Deficits Excessive?," IMF Working Papers, International Monetary Fund 96/85, International Monetary Fund.
  11. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, World Bank Group, vol. 9(2), pages 305-33, May.
  12. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 31(59), pages 369-84, December.
  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, Reserve Bank of New Zealand, vol. 61, March.
  14. 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, The University of Melbourne 518, The University of Melbourne.
  15. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 84(2), pages 147-59.
  16. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(428), pages 107-28, January.
  17. Paul Cashin & C. John McDermott, 1998. "International Capital Flows and National Creditworthiness," IMF Working Papers, International Monetary Fund 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, Elsevier, vol. 18(1), pages 1-12, January.
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Citations

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Cited by:
  1. 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, Elsevier, vol. 25(8), pages 1277-1295, December.
  2. Iris Claus & David Haugh & Grant Scobie & Jonas Tornquist, 2001. "Saving and growth in an open economy," Treasury Working Paper Series, New Zealand Treasury 01/32, New Zealand Treasury.
  3. Anthony Makin & Wei Zhang & Grant Scobie, 2009. "The contribution of foreign borrowing to the New Zealand economy," New Zealand Economic Papers, Taylor & Francis Journals, Taylor & Francis Journals, vol. 43(3), pages 263-278.
  4. Khundrakpam, J. K. & Ranjan, Rajiv, 2008. "Can an Inter-temporal Model Explain India's Current Account Balance?," MPRA Paper 50928, University Library of Munich, Germany.
  5. Jacques Miniane & Benoît Mercereau, 2004. "Challenging the Empirical Evidence From Present Value Models of the Current Account," IMF Working Papers, International Monetary Fund 04/106, International Monetary Fund.
  6. 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.

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