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On the Empirical Evidence of the Intertemporal Current Account Model for the Euro Area Countries

  • Michele Ca' Zorzi
  • Michał Rubaszek

In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries’ current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role. JEL Classification: D91, F36, F41

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File URL: http://hdl.handle.net/10.1111/j.1467-9361.2011.00648.x
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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 16 (2012)
Issue (Month): 1 (02)
Pages: 95-106

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Handle: RePEc:bla:rdevec:v:16:y:2012:i:1:p:95-106
DOI: j.1467-9361.2011.00648.x
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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers 233395, University of California-Berkeley, Department of Economics.
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