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

Author

Listed:
  • Kunhong Kim
  • Viv B Hall
  • Robert A Buckle

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

Abstract

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.

Suggested Citation

  • Kunhong Kim & Viv B Hall & Robert A Buckle, 2001. "New Zealand's Current Account Deficit: Analysis based on the Intertemporal Optimisation Approach," Treasury Working Paper Series 01/02, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:01/02
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    References listed on IDEAS

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    1. repec:wsi:wschap:9789813225343_0010 is not listed on IDEAS
    2. 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.
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    4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
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    Citations

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    Cited by:

    1. Iris Claus & David Haugh & Grant Scobie & Jonas Tornquist, 2001. "Saving and growth in an open economy," Treasury Working Paper Series 01/32, New Zealand Treasury.
    2. Anthony Makin & Wei Zhang & Grant Scobie, 2008. "The Contribution of Foreign Borrowing to the New Zealand Economy," Treasury Working Paper Series 08/03, New Zealand Treasury.
    3. International Monetary Fund, 2006. "New Zealand; Selected Issues," IMF Staff Country Reports 06/161, International Monetary Fund.
    4. Jacques A Miniane & BenoƮt Mercereau, 2004. "Challenging the Empirical Evidence From Present Value Models of the Current Account," IMF Working Papers 04/106, International Monetary Fund.
    5. Khundrakpam, J. K. & Ranjan, Rajiv, 2008. "Can an Inter-temporal Model Explain India's Current Account Balance?," MPRA Paper 50928, University Library of Munich, Germany.
    6. Lau, Evan & Baharumshah, Ahmad Zubaidi & Habibullah, Muzafar Shah, 2007. "Accounting for the Current Account Behavior in ASEAN-5," MPRA Paper 1322, University Library of Munich, Germany.
    7. Anthony Makin & Wei Zhang & Grant Scobie, 2009. "The contribution of foreign borrowing to the New Zealand economy," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(3), pages 263-278.
    8. Kim, Kunhong & Hall, Viv B. & Buckle, Robert A., 2006. "Consumption-smoothing in a small, cyclically volatile open economy: Evidence from New Zealand," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1277-1295, December.

    More about this item

    Keywords

    current account; intertemporal; consumption-smoothing; New Zealand;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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