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An Absorption Approach to Modeling the US Current Account

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  • Juann H. Hung
  • Edward N. Gamber

Abstract

This paper derives and estimates a current account model based on the absorption approach (which views the current account balance as the difference between domestic saving and investment). This approach provides a framework which allows drivers of cross-border financial flows and other determinants of saving and investment to be included in a current account model, an advantage not offered by the elasticity approach (which views the current account balance as the sum of net exports, net investment income, and net unilateral transfer). We estimate and compare vector error-correction models of the absorption and elasticity approaches, with the absorption model nesting the elasticity model. We find that (1) the restrictions imposed by the elasticity model are rejected; and (2) the mean-squared prediction errors of the absorption model are significantly smaller than those of the elasticity model. Copyright © 2010 Blackwell Publishing Ltd.

Suggested Citation

  • Juann H. Hung & Edward N. Gamber, 2010. "An Absorption Approach to Modeling the US Current Account," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 334-350, May.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:2:p:334-350
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    References listed on IDEAS

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    1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
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    10. Marquez, Jaime, 1990. "Bilateral Trade Elasticities," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 70-77, February.
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    Cited by:

    1. Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.
    2. Kamel Jlassi, 2015. "Modelling and Forecasting of Tunisian Current Account: Aggregate versus Disaggregate Approach," IHEID Working Papers 13-2015, Economics Section, The Graduate Institute of International Studies.

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