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The present-value model of the current account has been rejected: Round up the usual suspects

  • Nason, James M.
  • Rogers, John H.

Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the "usual suspects" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a "canonical" RBC model moves closest to the data when it features exogenous world real interest rate shocks.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 68 (2006)
Issue (Month): 1 (January)
Pages: 159-187

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Handle: RePEc:eee:inecon:v:68:y:2006:i:1:p:159-187
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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