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

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  • Kano, Takashi

Abstract

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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  • Kano, Takashi, 2008. "A structural VAR approach to the intertemporal model of the current account," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 757-779, September.
    • Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:757-779
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    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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