Abstract
The Argentinean current account has exhibited large fluctuations over time. Sizable deficits over the last part of the 19th century and beginning of the 20th were followed by an almost equilibrated balance for most of the 20th century. Moderate deficits were again recorded between 1990 and 2002. Can factors highlighted by the intertemporal approach to the current account explain the dynamics of the Argentinean external sector for the 1885–2002 period? To answer this question we make use of a model featuring two main external shocks for small economies: real interest rates and exchange rates. In contrast to its application to other Latin American countries, the intertemporal model does not track well the actual current account from 1885 to 2002 in Argentina. This is due to the country's lack of access to the international financial system (a main assumption in the model), the occurrence of balance of payments crises, and the stop and go process. There is, however, some evidence in favor of the theory for the period 1885–1930, when capital mobility was relatively high and free of currency crises and stop and go cycles.
Highlights
A country’s current account balance over any time period is the increase in residents’ claims on foreign incomes or outputs, less the increase in similar foreign-owned claims on home income or output
Before estimating the Vector Auto Regression Model (VAR) model, we have to check that the variables that appear in it are stationary
In this paper we have presented an intertemporal model of the current account that was expected to take into account important sources of possible external shocks for small economies such as Argentina
Summary
A country’s current account balance over any time period is the increase in residents’ claims on foreign incomes or outputs, less the increase in similar foreign-owned claims on home income or output. In the simpler intertemporal models, a country’s current account surplus should be equal to the present value of expected future declines in output, net of investment and government purchases (called net output). In these papers there is no room for a variable real interest rate and for the real exchange rate. Given that the end of the XIXth and the beginning of the XXth century were very affluent times and that the opposite case applies for the period 1931-1991, it seems that in principle the theory should track the long run evolution of the current account in Argentina reasonable well.
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