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The present-value model of the current account has been rejected: round up the usual suspects

Author

Listed:
  • James M. Nason
  • John H. Rogers
Abstract
Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the \"usual suspects\" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a \"canonical\" RBC model moves closest to the data when it features exogenous world real interest rate shocks.

Suggested Citation

  • 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.).
    • Handle: RePEc:fip:fedgif:760
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    More about this item

    Keywords

    Balance of payments; International finance; Econometric models;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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