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A Derivation Of The Optimal Current Account Balance For Barbados, Jamaica And Trinidad And Tobago

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  • JORDAN, Alwyn
  • STANFORD, Sunielle

Abstract

How can monetary authorities determine whether the current account balance is problematic? One method is based on the intertemporal consumption-smoothing model. This paper applies the intertemporal consumption-smoothing model - which is used to derive the optimal current account - to Barbados, Jamaica and Trinidad and Tobago. Once the optimal current account has been derived, it is then compared with actual current account balances and more stringent statistical tests to indicate the efficacy of the model. The findings indicate that the optimal consumption-smoothing model is neither applicable to Barbados nor Trinidad and Tobago, but in contrast, the optimal model that assumes no restrictions on capital flows is valid for Jamaica.

Suggested Citation

  • JORDAN, Alwyn & STANFORD, Sunielle, 2006. "A Derivation Of The Optimal Current Account Balance For Barbados, Jamaica And Trinidad And Tobago," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(1).
  • Handle: RePEc:eaa:aeinde:v:6:y:2006:i:1_11
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    References listed on IDEAS

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    1. 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 1249-1273, November.
    2. Fabio Scacciavillani & Malcolm D. Knight, 1998. "Current Accounts; What Is Their Relevance for Economic Policymaking?," IMF Working Papers 98/71, International Monetary Fund.
    3. 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 1062-1088, October.
    4. 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.
    5. Tim Callen & Paul Cashin, 1999. "Assessing External Sustainability in India," IMF Working Papers 99/181, International Monetary Fund.
    6. 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, vol. 9(2), pages 305-333, May.
    7. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
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    More about this item

    Keywords

    Optimal current account; Consumption-smoothing;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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