Consumption, external assets and the real interest rate

Abstract

An intertemporal model is used to explain the long-run behavior of external assets. The model predicts that consumption, income and net external assets are cointegrated; a maximum likelihood procedure is used to test this hypothesis and to test linear restrictions implied by the model. Seven countries are considered with variable results. The model performs well for the United States and Germany, but yields improbable estimates of the real interest rate for the smaller economies considered. Adjustments for currency valuation effects improve the results for some of the small economies.