Interest Rates, Exchange Rates and Present Value Models of the Current Account

This paper develops a testable intertemporal model of the current account that allows for variable interest rates and exchange rates. These additional variables are channels through which external shocks may influence the domestic current account. The restrictions from the theoretical model are subjected to present value tests using quarterly data from three small open economies. The paper finds that including the interest rate and exchange rate improves the fit of the intertemporal model over what was found in previous studies. The model predictions better replicate the volatility of current account data and better explain historical episodes of current account imbalance.     

A Model of Endogenous Nontradability and its Implications for the Current Account*

This paper studies how nontraded goods limit the ability of a country to finance current account deficits. It uses an intertemporal model of the current account for a small open economy where goods are endogenously nontraded due to explicit trade costs. The economy has an endowment of two goods with differing trade costs, either of which can be traded or nontraded in equilibrium. The model implies that current account deficits impose a cost, in the form of raising the effective interest rate in the country. The findings differ from some recent studies: first, in that the interest rate rises even for countries with modest current account deficits; secondly, the interest rate cost eventually reaches an upper bound as current account deficits grow, and progressively more nontraded goods become traded to service the debt. Panel regression analysis of interest rate and current account data is consistent with our conclusions.     

Endogenous current account balances in a world CGE model with international financial assets

This paper presents an applied computable general equilibrium world model with financial assets and endogenous current account, and capital and financial account balances. The capital and financial account equilibrium conditions, rather than exogenous rules, constrain the current account balance. International capital flows which balance the current account are constrained by supply-and-demand equilibrium conditions on the market for international debt securities, under portfolio managers' optimizing behavior. The asset–liability structure of the financial portfolio is endogenous, and it is possible for a country-agent to have negative net financial assets. In simulations, the interaction of portfolio choices with trade supply and demand behavior leads to endogenous sign reversals in some current account balances, and it results in a different allocation of investment among regions, compared to a model with exogenously determined current account balances. In the reference scenario, this allocation generates growth that is about the same globally, but differently distributed between regions.     

人口结构变化与中国贸易顺差:理论与实证研究

文章首先通过构建一个开放经济三期世代交替模型讨论了人口结构变化对中国经常账户余额的影响。理论研究发现,少儿抚养系数的下降会引起储蓄率相对于投资率上升从而形成经常账户盈余,人口老龄化会降低储蓄率从而对经常账户余额产生负向影响。文章然后运用中国1993-2009年省级面板数据进行了实证分析,经验结论与理论模型预测一致,人口结构变化能够解释中国经常账户余额变化的近45%。在控制了其他解释变量后,人口年龄结构变量对经常账户的影响依然显著。文章的估计结果对替代性的经常账户余额指标、人口年龄结构变量的选取以及模型的动态设定也非常稳健。     

An Absorption Approach to Modeling the US Current Account

This paper derives and estimates a current account model based on the absorption approach (which views the current account balance as the difference between domestic saving and investment). This approach provides a framework which allows drivers of cross‐border financial flows and other determinants of saving and investment to be included in a current account model, an advantage not offered by the elasticity approach (which views the current account balance as the sum of net exports, net investment income, and net unilateral transfer). We estimate and compare vector error‐correction models of the absorption and elasticity approaches, with the absorption model nesting the elasticity model. We find that (1) the restrictions imposed by the elasticity model are rejected; and (2) the mean‐squared prediction errors of the absorption model are significantly smaller than those of the elasticity model.     

The impact of financial regulation on current account balances

Both global imbalances and financial market deregulation feature prominently among the potential causes of the global financial crisis, but they have been largely discussed separately. In this paper, we take a different angle and investigate the relationship between financial market regulation and current account balances, an area for which limited empirical evidence exists. We use a panel of countries over the period 1980–2010 and employ a novel empirical approach which allows us to simultaneously account for model uncertainty, current account persistence and unobserved heterogeneity. We find robust evidence that financial market regulations affect current account balances and that different aspects of these regulations can have opposing effects on the current account. In particular we find that easing bank entry barriers is negatively associated with the current account balance. In contrast, bank privatization and securities market deregulation tend to raise current account balances. Our results also highlight the importance to control for persistence and unobserved heterogeneity. Once we control for these factors, we find robust evidence for a wide range of current account theories in contrast to previous studies accounting for model uncertainty.     

International capital mobility: An alternative test based on intertemporal current account models

This paper examines international capital mobility by estimating intertemporal current account models for nine major industrialized countries. To account for the large fluctuations of oil prices (the terms-of-trade) and their effects on the current account, an intertemporal current account model incorporating such effects is devised. The model estimation reveals significant terms-of-trade effects on the current account and, moreover, does not exhibit any “excess capital mobility” found in the previous literature. These results indicate that to achieve a more accurate measure of international capital mobility, a proper account of the terms-of-trade effect is essential.     

Macroeconomic Volatility and the Current Account: Evidence from a Panel of OECD Countries

ABSTRACT

This paper investigates the relationship between macroeconomic volatility and the current account. Using quarterly data for a panel of OECD economies, time-varying relative volatility measures are constructed for GDP, net output, and government consumption. The empirical evidence suggests that current account balances are positively affected by all three volatility measures. Moreover, the current account balance is found to be related positively to output growth and negatively to the growth of government consumption. Evidence from saving and investment rates also suggests that the precautionary saving motive is part of (though perhaps not the entire) mechanism that relates output volatility and the current account. Broadly consistent with the predictions of the standard theoretical model, these estimates are sizable, statistically significant, and robust.     

On the Empirical Evidence of the Intertemporal Current Account Model for the Euro Area Countries

A simple intertemporal current account model is found to explain successfully the current account configuration in the euro area before the Great Recession. The analysis suggests that consumption smoothing, prompted by expectations of economic convergence and the removal of exchange rate risk, has been an important driving force for the build‐up of current account divergence in the euro area since the creation of monetary union. The model also predicts that current account deficits and surpluses would narrow under a post‐crisis scenario of moderate catching‐up and more segmented bond markets.     

On the optimality and sustainability of Turkey’s current account

We analyze Turkey’s current account optimality and sustainability between 1992 and 2004. Using the intertemporal benchmark model for Turkey’s current account we test for its intertemporal solvency. Based on traditional and alternative tests (which account for persistence in the current account), we conclude that Turkey breached the intertemporal solvency condition in the sample period. In addition, stationarity tests of the deviation between actual and optimal net external liabilities series confirm that Turkey’s current account deficit was unsustainable for that period. However, further econometric investigation and analysis of reforms causes us to question our conclusions of non-optimality and unsustainability of the Turkish current account for the latter part of the period. We are indebted to two anonymous referees for insightful comments and suggestions. We would also like to thank seminar participants at Middle Eastern Technical University, Ankara, Turkey, for comments on an earlier version of this paper. Responsibility for all errors remains with the authors.     

Long-Run and Short-Run Behavior of Korea's Current Account

Recent research indicates that an error correction mechanism exists for current account imbalances in Germany, Japan, and the United States. In this paper, I test whether current account imbalances in Korea are also self-correcting. The Empirical results are ambiguous: while no conintegrating relationship can be detected, and error correction mechanism can. Using standard econometric methods, estimates of a small-scale macroeconomic model detect no effect of Korea's lagged net foreign claim position on any relevant variable. However, I do find that the current account is influenced by Korea's lagged net foreign claim position in a direct estimate of Korea's current account. [F32]     

Stabilization of the balance of payments in a small,planned economy,with an application to ethiopia

We construct a macroeconomic model of a planned economy and derive a currency basket that will stabilize the current account. The exchange rate is incorporated in a monetary system so as to derive consistent money and price targets. If the planners have access to foreign loans, they may target a negative current account. The model is estimated for Ethiopia. Having derived weights for the currency basket corresponding to 1980, a simulation is carried out in which macroeconomic targets for 1980 are derived, based on past information.     

Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings*

We consider the origins of global current account imbalances. We first discuss how the expansion of the US current account deficit and the decrease in global real interest rates can be reconciled with the widespread view that American expansionary fiscal policy is partly the source of current trends. We then investigate empirically the medium‐term determinants of the current account using a model that controls for factors related to institutional development. In addition to the conventional macroeconomic factors, we examine a series of environmental factors, including the degree of financial openness and the extent of legal development. We find that for industrial countries, the government budget balance is an important determinant of the current account balance; the budget balance coefficient is 0.10 to 0.49 depending on model specifications. These varying estimates lead us to conclude that fiscal factors might be as important as excess savings arising from East Asia.     

Nontraded Goods and the Current Account

This paper investigates trade balance and current account behavior in response to various shocks when the economy produces and consumes both traded and nontraded goods. Previous analyses of these problems have interpreted current account behavior in terms of tension between parameters that measure intratemporal and intertemporal elasticity, respectively. This paper provides a simple general criterion for whether trade and current account behavior is "perverse" vis-à-vis the standard one-good model results: behavior is perverse if and only if traded and nontraded goods are Edgeworth complements; that is, if the cross-partial of the instantaneous utility function is positive.     

The Current Account, Fiscal Policy, and Medium-Run Income Determination

This article presents a new framework for analyzing the simultaneous determination of current account imbalances and the path of national income. Using standard macroeconomic behavioral relationships, it first examines how and why current account deficits matter by investigating links between domestic consumption, government spending, output, saving, investment, interest rates, and capital flows. Central to the model is the distinction between aggregate output and expenditure that enables dissection of the effects of discretionary fiscal change on the current account and national income. The framework yields results relevant to the twin deficits hypothesis that are contrary to those of standard models. (JEL E10 , F32 )     

Reforms,Finance, and Current Accounts

We analyze the implications of labor market reforms for an open economy's human capital investment and future production. A stylized model shows that labor market deregulation can imply more positive current‐account balances if financial markets are imperfect and labor market institutions not only distort labor allocation, but also smooth income. Empirically, in Organisation for Economic Co‐operation and Development (OECD) country‐level panel data, we find that labor market deregulation has been positively related to current‐account surpluses on average and more strongly so when and where financial market access was more limited. These results are robust to inclusion of standard determinants of current‐account imbalances, and do not appear to be driven by cyclical phenomena.     

A structural VAR model of the Fiji Islands

A four-dimensional Structural Vector Auto-regression (SVAR) model is applied to investigate the implications of fuel imports and devaluation policy on Fiji's current account deficits and economic growth. The paper finds that short-term deterioration of the current account is partly due to higher fuel imports. The impulse response analysis shows that a standard deviation fall in Fiji's REER leads to a J-curve type response in the current account within a short period. Furthermore, fuel import demand and devaluations are found to have negative, but transitory, effect on economic growth.     

The Austrian current account deficit: Driven by twin deficits or by intertemporal expenditure allocation?

The evidence presented in the paper rejects the twin deficit hypothesis for the Austrian current account balance during the last two decades. The results are based on an estimate of a vector error correction model including quarterly data for the current account balance and potentially relevant variables driving its dynamics. We compute the variance decomposition of the current account's forecast error and its generalized impulse responses to shocks in the innovations of the system. The results in favor of intertemporal expenditure reallocation cannot be reproduced within a second analysis including the current account and a measure of net output, however. The estimated implicit current account balance, interpreted as the discounted expected change in future net output, does not follow the actual behaviour of the current account. First version received: June 1999/Final version received: March 2001     

When old meets young? Germany's population ageing and the current account

In a three-region New Keynesian life-cycle model calibrated to Germany, the Euro area (without Germany) and the rest of the world, we analyze the impact of population ageing on net foreign asset and current account developments. Using unsynchronized demographic trends by taking those of Germany as given and assuming constant population everywhere else, we are able to generate German current account surpluses of up to 15% of GDP during the first half of this century. However, projected demographic trends from 2000 to 2080 in OECD countries (and China in an additional analysis) are much more synchronized. Feeding these into our model suggests that the average annual German current account surplus from 2000 to 2018 that should be attributed to ageing reduces to around 2.83% (1.23%) of GDP, with a maximum at 4.3% (2.7%) in 2006 (when taking into account China), turning negative around 2035.     

HOUSEHOLD SAVING,FINANCIAL CONSTRAINTS,AND THE CURRENT ACCOUNT IN CHINA

In this article, we present a model that can account for the changes in the current account balance in China since the 2000s. Our results suggest that inadequate insurance through government programs for the elderly and the decline in family insurance due to the one-child policy led to large increases in the household saving rate. These increases coupled with the financial frictions preventing the household saving from being invested in domestic firms resulted in large current account surpluses until 2008. Relaxation of financial constraints, on the other hand, was responsible for the decline in the current account surplus after 2008.