The relative dynamics of investment and the current account in the G-7 economies
This paper contributes to the empirics of the intertemporal approach to the current account. We use a cointegrated VAR framework to identify permanent and transitory components of country-specific and global shocks. Our approach allows us to empirically investigate the sensitivity to persistence implied by many forward-looking models and our results shed new light on the excess volatility of investment encountered by Glick and Rogoff (JME 1995). In G7 data, we find the relative current-account and investment response to be in line with the intertemporal approach. Keywords; intertemporal approach to the current account, cointegration, excess sensitivity, investment JEL classification: F41, F43
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