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The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence

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  • Razin, Assaf

Abstract

The past decade has witnessed the development of a large theoretical literature on the intertemporal approach to the current account. These models typically emphasized the effects on the current account balance of real factors such as productivity, terms of trade, government spending and taxes via intertemporal substitution in consumption, production and investment. Could this micro based theory in any meaningful sense be wrong? The answer lies in the efforts to derive its empirical implications. Essentially the test of this theory is in proving the empirical importance of the role played by the intertemporal substitution. While this paper does not engage in formal statistical testing of the theory, the numbers it presents and the analysis of them shed light on the validity of the key testable hypotheses. The paper models investment and consumption (saving) in ways that emphasize intertemporal optimization and the differing effects of various shocks. Four different kinds of shocks are distinctly treated: transitory or persistent in duration, and common or idiosyncratic across countries. Incorporating these considerations the paper brings out a body of evidence in support of the key propositions of the dynamic-optimizing approach.

Suggested Citation

  • Razin, Assaf, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Foerder Institute for Economic Research Working Papers 275573, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275573
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    References listed on IDEAS

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    1. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February.
    2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    3. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 10(2), pages 1-29, November.
    4. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061430, January.
    5. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
    6. Assaf Razin & Chi-Wa Yuen, 1992. "Convergence in Growth Rates: The Role of Capital Mobility and International Taxation," NBER Working Papers 4214, National Bureau of Economic Research, Inc.
    7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    8. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
    9. Leonardo Leiderman & Assaf Razin, 1991. "Determinants of External Imbalances: The Role Taxes, Government Spending and Productivity," NBER Working Papers 3738, National Bureau of Economic Research, Inc.
    10. Leiderman, Leonardo & Razin, Assaf, 1991. "Determinants of external imbalances: The role of taxes, government spending, and productivity," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 421-450, December.
    11. Cardarelli, Roberto & Sefton, James & Kotlikoff, Laurence J, 2000. "Generational Accounting in the UK," Economic Journal, Royal Economic Society, vol. 110(467), pages 547-574, November.
    12. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
    13. Rebelo, Sergio, 1992. "Growth in open economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 36(1), pages 5-46, July.
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    16. Razin, Assaf, 1984. "Capital movements, intersectoral resource shifts and the trade balance," European Economic Review, Elsevier, vol. 26(1-2), pages 135-152.
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    18. Rabelo, S., 1992. "Inflation in Fixed Exchange Rate Regimes: The Recent Portuguese Experience," Papers 517, Stockholm - International Economic Studies.
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    More about this item

    Keywords

    Financial Economics; Research Methods/ Statistical Methods;

    JEL classification:

    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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