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A structural VAR approach to the intertemporal model of the current account

Listed author(s):
  • Kano, Takashi

The intertemporal current account approach predicts that the current account of a small open economy is independent of global shocks, and that responses of the current account to country-specific shocks depend on the persistence of the shocks. This paper shows that these predictions impose cross-equation restrictions (CERs) on a structural vector autoregression (SVAR). To test the CERs, this paper develops identification schemes of the SVAR that exploit the orthogonality of the world real interest rate and country-specific shocks as well as the lack of a long-run response of net output to transitory shocks. Tests of the SVAR reveal two puzzling aspects of the Canadian and U.K. current account: (i) the response of the current account to a country-specific transitory shock is too large and (ii) the fluctuations in the current account are dominated by country-specific transitory shocks that explain almost none of the fluctuations in net output growth. These results imply the crucial role of consumption-tilting factors in explaining current account fluctuations of the two economies.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 5 (September)
Pages: 757-779

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:757-779
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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