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The current account and stock returns

  • Kitamura, Yoshihiro

In this paper, I use stock return data to test an intertemporal model of the current account. I find that the model performs well in three countries: the U.K., Canada, and Japan. Hall [Hall, R.E., 1978. Stochastic implication of the life cycle-permanent income hypothesis: theory and evidence. J. Polit. Econ. 86 (6), 971-987] points out that because stock price predicts the future state of the economy, it predicts consumption. Assuming that consumption depends on permanent income, my empirical finding indicates that a representative agent smoothes consumption based on stock market information. In other words, stock market returns yield information about permanent income.

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Article provided by Elsevier in its journal Research in International Business and Finance.

Volume (Year): 23 (2009)
Issue (Month): 3 (September)
Pages: 302-321

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Handle: RePEc:eee:riibaf:v:23:y:2009:i:3:p:302-321
Contact details of provider: Web page: http://www.elsevier.com/locate/ribaf

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  1. Talan Iscan, 1999. "Present Value Tests of the Current Account with Durables Consumption," Department of Economics at Dalhousie University working papers archive present, Dalhousie, Department of Economics.
  2. Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
  3. Apergis, Nicholas & Miller, Stephen M., 2006. "Consumption asymmetry and the stock market: Empirical evidence," Economics Letters, Elsevier, vol. 93(3), pages 337-342, December.
  4. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Testing an optimizing model of the current account via the consumption function," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 220-233, June.
  5. James M. Poterba & Andrew A. Samwick, 1995. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 295-372.
  6. Romer, Christina D, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 597-624, August.
  7. Maurice Obstfeld & Kenneth Rogoff, 1994. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
  8. Paul Bergin & Steven Sheffrin, . "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Department of Economics 97-22, California Davis - Department of Economics.
  9. Benoît Mercereau, 2003. "The Role of Stock Markets in Current Account Dynamics; Evidence From the United States," IMF Working Papers 03/108, International Monetary Fund.
  10. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  11. 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 1062-88, October.
  12. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  13. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 147-59.
  14. Benoît Mercereau, 2004. "The Role of Stock Markets in Current Account Dynamics; A Time Series Approach," IMF Working Papers 04/50, International Monetary Fund.
  15. Mercereau Benoit, 2003. "The Role of Stock Markets in Current Account Dynamics: a Time Series Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, April.
  16. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
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