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

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  • Paul Bergin
  • Steven Sheffrin

Abstract

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.

Suggested Citation

  • Paul Bergin & Steven Sheffrin, "undated". "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Department of Economics 97-22, California Davis - Department of Economics.
    • Handle: RePEc:fth:caldec:97-22
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    File URL: http://www.econ.ucdavis.edu/working_papers/97-22.pdf
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    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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