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Productivity shocks, budget deficits and the current account

  • Bussière, Matthieu
  • Fratzscher, Marcel
  • Müller, Gernot J.

Productivity shocks and budget deficits are considered to be two key determinants of the current account. In order to assess formally the role of both factors in driving current account movements, the present paper extends the standard intertemporal model of the current account to allow for Non-Ricardian household behavior. Testable cross-equation restrictions for the current account and investment are derived by drawing on the distinction between country-specific and global innovations to productivity as well as to the government budget. We test the restrictions of the model against time series data for 21 OECD countries and find evidence in support of the model.

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

Volume (Year): 29 (2010)
Issue (Month): 8 (December)
Pages: 1562-1579

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:8:p:1562-1579
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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