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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. Norback, Pehr-Johan & Persson, Lars, 2007. "Investment liberalization -- Why a restrictive cross-border merger policy can be counterproductive," Journal of International Economics, Elsevier, pages 366-380.
    2. Bjorvatn, Kjetil, 2004. "Economic integration and the profitability of cross-border mergers and acquisitions," European Economic Review, Elsevier, vol. 48(6), pages 1211-1226, December.
    3. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    4. Hassan Benchekroun & Amrita Ray Chaudhuri, 2006. "Trade Liberalization and the Profitability of Mergers: a Global Analysis," Review of International Economics, Wiley Blackwell, vol. 14(5), pages 941-957, November.
    5. Horn, Henrik & Persson, Lars, 2001. "The equilibrium ownership of an international oligopoly," Journal of International Economics, Elsevier, pages 307-333.
    6. Ross, Thomas W., 1988. "On the price effects of mergers with freer trade," International Journal of Industrial Organization, Elsevier, pages 233-246.
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    Cited by:

    1. 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.
    2. Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.

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