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New Zealand's Current Account Deficit: Analysis based on the Intertemporal Optimisation Approach

  • Kunhong Kim
  • Viv B Hall
  • Robert A Buckle

    ()

    (School of Economics and Finance, Victoria University (Kim and Hall)
    New Zealand Treasury (Robert Buckle))

New Zealand's Current Account of the Balance of Payments has been persistently in deficit since the early 1970s and increased markedly during the late 1990s. Is this a cause for significant concern? This paper tackles this question by evaluating New Zealand's external solvency, the degree of optimality of the intertemporal consumption smoothing through its current account, and whether its international financial capital flows have been used in an optimal (consumption-smoothing) fashion. We carry out statistical tests in relation to external solvency. We also estimate a "benchmark" consumption-smoothing component for its current account based on an intertemporal optimisation model in order to carry out tests of the optimality of the size and volatility of the current account. We could not reject the hypotheses that New Zealand's current account was consistent with optimal smoothing, that the external solvency condition has been satisfied, and that there is "no excess volatility" in international financial capital flows.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2001/01-02/twp01-02.pdf
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Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 01/02.

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Length: 25 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:nzt:nztwps:01/02
Contact details of provider: Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz

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  1. 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.
  2. C. John McDermott & Paul Cashin, 1996. "Are Australia's Current Account Deficits Excessive?," IMF Working Papers 96/85, International Monetary Fund.
  3. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
  4. Atish R. Ghosh & Jonathan David Ostry, 1994. "Export Instability and the External Balance in Developing Countries," IMF Working Papers 94/8, International Monetary Fund.
  5. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, vol. 9(2), pages 305-33, May.
  6. Paul Cashin & C. John McDermott, 1998. "International Capital Flows and National Creditworthiness; Do the Fundamental Things Apply As Time Goes By?," IMF Working Papers 98/172, International Monetary Fund.
  7. Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 206-23, May.
  8. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers C94-044, University of California at Berkeley.
  9. 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.
  10. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1996. "Persistent Current Account Deficits: A Warning Signal?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 161-81, July.
  11. Agenor, P.R. & Bismut, C. & Cashin, P. & McDermott, C.J., 1996. "Consumption Smoothing and the Current Account: Evidence for France, 1970-94," Department of Economics - Working Papers Series 518, The University of Melbourne.
  12. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November.
  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. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Wiley Blackwell, vol. 31(59), pages 369-84, December.
  15. 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.
  16. Agenor, Pierre-Richard & Bismut, Claude & Cashin, Paul & McDermott, C. John, 1999. "Consumption smoothing and the current account: evidence for France, 1970-1996," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 1-12, January.
  17. Sean Collins & Francisco Nadal De Simone & David Hargreaves, 1998. "The current account balance: an analysis of the issues," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, March.
  18. 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.
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