Consumption-smoothing in a small, cyclically volatile open economy: Evidence from New Zealand |
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Authors: | Kunhong Kim Viv B. Hall Robert A. Buckle |
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Affiliation: | aSchool of Economics and Finance, Victoria University of Wellington, PO Box 600, Wellington, New Zealand;bThe Treasury, PO Box 3724, Wellington, New Zealand |
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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. Should this cause significant concern, for such a small, cyclically volatile open economy? Our results show that VAR1 and VAR2 forms of the traditional intertemporal consumption-smoothing model reflect very satisfactorily the volatile directions and turning points observed, that the data are not consistent with consumption-tilting to the present, and that New Zealand has had considerable success to date in consumption-smoothing around its average 5% current account deficit. Perhaps more unexpectedly, a Bergin–Sheffrin-type model of a small open economy with variable interest rates and exchange rates has not performed noticeably better. |
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Keywords: | Current account Intertemporal Consumption-smoothing New Zealand |
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