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Interest Rates, Exchange Rates And Present Value Models Of The Current Account

  • Steven M. Sheffrin
  • Paul Bergin

    (Department of Economics, University of California Davis)

This paper develops an intertemporal model of the current account that allows for variable interest rates and exchange rates. These additional variables are channels through which external shocks may influence the domestic current account. We test the restrictions imposed by the theory, using quarterly data from three small open economies. The paper finds that including the interest rate and exchange rte significantly improves the fit of the intertemporal model over what was found in previous studies. the augmented model produces a forecast that better matches the volatility of current account data and better explains historical episodes of current account imbalance.

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File URL: http://wp.econ.ucdavis.edu/97-22.pdf
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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 9722.

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Date of creation: 09 Jan 2003
Date of revision:
Handle: RePEc:cda:wpaper:97-22
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  1. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  2. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  3. 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.
  4. Campbell, John Y., 1999. "Asset prices, consumption, and the business cycle," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 19, pages 1231-1303 Elsevier.
  5. Otto, Glenn & Voss, Graham M., 1995. "Consumption, external assets and the real interest rate," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 471-494.
  6. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Wiley Blackwell, vol. 31(59), pages 369-84, December.
  7. Huang, Chao-Hsi & Lin, Kenneth S., 1993. "Deficits, government expenditures, and tax smoothing in the United States: 1929-1988," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 317-339, June.
  8. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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