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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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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
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  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.
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  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.
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  17. 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.
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