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The Current Account and the Interest Differential in Canada

  • Martin Boileau
  • Michel Normandin

For post-1975 Canadian data, we document the joint behavior of output, the current account, and the interest differential at the business cycle frequency. We also interpret the joint behavior using a simple small open economy model. Our simple model assumes that agents have access to world international financial markets, but face country-specific interest rate on their holdings of world assets. The interest differential depends negatively on the country's net foreign asset position. We find that our simple model matches the Canadian data remarkably well.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0424.

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Date of creation: 2004
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Handle: RePEc:lvl:lacicr:0424
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  1. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
  2. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  3. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
  4. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  5. Michael B. Devereux & Allan W. Gregory & Gregor W. Smith, 1990. "Realistic Cross-Country Consumption Correlations in a Two-Country, Equilibrium, Business Cycle Model," Working Papers 774, Queen's University, Department of Economics.
  6. Alan M. Taylor, 2002. "A Century of Current Account Dynamics," NBER Working Papers 8927, National Bureau of Economic Research, Inc.
  7. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal.
  8. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: round up the usual suspects," International Finance Discussion Papers 760, Board of Governors of the Federal Reserve System (U.S.).
  10. Marc-André Letendre, 2004. "Capital utilization and habit formation in a small open economy model," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 721-741, August.
  11. Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  12. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  13. A. Senhadji Semlali, 1997. "Sources of Debt Accumulation in a Small Open Economy," IMF Working Papers 97/146, International Monetary Fund.
  14. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June.
  15. Michael B. Devereux & Gregor W. Smith, 2004. "Transfer Problem Dynamics: Macroeonomics of the Franco-Prussian War Indemnity," Working Papers 022004, Hong Kong Institute for Monetary Research.
  16. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  17. Boileau, Martin & Normandin, Michel, 2008. "Dynamics of the current account and interest differentials," Journal of International Economics, Elsevier, vol. 74(1), pages 35-52, January.
  18. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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