Intertemporal Model Of Current Account Research Articles

The dynamic relationship between macroeconomic factors and current account balance: Panel evidence from 28 African countries

This study empirically tests the validity of the current account theory using a panel ARDL estimation technique for 28 African countries from 1980 to 2019. Also, the study examined the effect of private consumption, income, government spending, investment, and inflation on the current account balance. Applying data to Obstfeld and Rogoff‘s inter-temporal current account model, the results show that the current account theory holds for the selected SSA countries in the short run but not in the long run. In addition, the study finds that an increase in private consumption, government expenditure, and investment leads to the deterioration of the current account balance in both the long and short run. In contrast, higher GDP per capita and inflation improved the current account balance in both the long and short run. The novelty of the article is that it is the first study to empirically test the validity of Obstfeld and Rogoff's inter-temporal current account model. This study also contributes to the literature focusing on developing countries, specifically, African countries. The study recommends that policymakers adopt policies to promote private savings, economic growth, fiscal discipline and macroeconomic stability to stimulate the current account balance in the region.

Introducing house prices to the intertemporal current account model: An application to the European Union

The last 30 years have been marked by significant and persistent external imbalances. To examine the relationship between the current account balance and its determinants, particularly house prices, we extend the intertemporal model of the current account. We introduce the prices of durables to the theoretical model to account for house prices. In addition to house prices, the theoretical model also incorporates fiscal balance, income, investment, and government spending to explain external imbalances. We test the model for the European Union's member states between 2000 and 2019 using a system generalized method of moments model, which performs well empirically as the coefficients are significant and have the predicted sign. Our findings indicate that rising house prices exacerbate the current account balance due to the wealth effect on consumption. Within the European Union, house prices have the most negative impact on the current account balance in Central and Eastern European countries. • We examine how house prices affect the current account balance. • We add the prices of durables to the intertemporal model of the current account to account for house prices. • We apply the theoretical model to EU countries from 2000 to 2019 using the system GMM estimator. • We find that rising house prices worsen the current account balance through the wealth effect on consumption. • The impact of house prices on the current account differs significantly in CEEC when compared to other EU member states.

Housing prices and trade surpluses in China: An inter-temporal approach

This paper develops an inter-temporal current account model to study the impacts of expected rising housing prices on trade surpluses in China. The model shows two channels working in opposite directions. The first channel is the intra-temporal substitution channel. It discourages current consumption of tradable goods, leading to trade surpluses. The second is the inter-temporal substitution channel, which instead leads to trade deficits. When intra-temporal channel dominates, expected rising housing prices lead to trade surpluses. However, borrowing constraints on housing purchases may weaken the intra-temporal substitution channel and thus weaken the positive correlation between expected housing prices and trade surpluses. We show empirically that expected rising housing prices lead to trade surpluses in China. We also identify possible reason for this finding: strong intra-temporal substitution elasticity due to large male to female sex ratio in China. We further show that the positive relation between expected rising housing prices and trade surpluses is weaker in regions with more stringent borrowing constraints, consistent with our model’s prediction.

Current account dynamics under information rigidity and imperfect capital mobility

The current account in developed countries is highly persistent and volatile in comparison to their output growth. The standard intertemporal current account model with rational expectations (RE) fails to explain the observed current account and consumption dynamics. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for the consumption dynamics, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility explains both the current account and consumption, provided that sufficiently high degrees of information rigidity and imperfect capital mobility are considered.

House Prices and Current Account Evolution in the European Union: An Intertemporal Approach

Based on the dynamic equation of the intertemporal current account model, we estimated a current account balance between 2000 and 2014 for the EU countries due to the role played by different determinants. More precisely, we presented the effect of fiscal balance and house prices along with other variables for the purpose of explaining the external disequilbria among the member states. Our results indicate that the last real estate bubble has worsened the external imbalances of the members within the European Union. We also identified an asymmetric effect of real estate prices upon the current account of various countries within the European Union.

Current Account Dynamics Under Information Rigidity and Imperfect Capital Mobility

The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.

Current Account Dynamics Under Information Rigidity and Imperfect Capital Mobility

The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.

The Dynamics of the Brazilian Current Account with Rule of Thumb Consumers

O modelo intertemporal tradicional da conta corrente assume que todos os indivíduos seguem a teoria da renda permanente. A inovação propostanestetrabalhoéincorporaraomodeloclássicodadinâmicadaconta corrente a ideia de que uma parte dos consumidores apresenta comportamento do tipo rule of thumb. São estimadas a parcela da renda agregada que segue o comportamento rule of thumb e o coeficiente de formação de hábitos. Usando os dados de conta corrente para a economia brasileira,os resultados confirmam alguns fatos estilizados apresentados na literatura assim como algumas proposições básicas testáveis do modelo intertemporal da conta corrente

Trade Reforms and Current Account Imbalances

In partial equilibrium, a reduction in import barriers may be thought to lead to an increase in imports and a reduction in trade surplus. However, the general equilibrium effect can go in the opposite direction. We study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. We show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, efficient trade reforms can contribute to global current account imbalances, but these imbalances do not need policy corrections.

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.

Current Account and Comsumption-Smoothing in Ecuador Through Co-Integration Relations (In Spanish)

The report analyzes the relation between private consumption and the current account, regarding it as the external savings of economy. The study is carried out through of an inter-temporal current account model, which is derived from the Permanent Income Theory. This approach, according to the permanent income model with inter-temporal smoothing of consumption allows us to know whether the current account of the balance of payment in the Ecuadorian economy either behaves optimally or is away from the equilibrium level. It was found out that observed consumption differed greatly during 1970-1992 approximately, but in the liberalization period of economy, the observed consumption is bigger than the optimal consumption component and there is a tendency towards convergence.

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.

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

In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries’ current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role. JEL Classification: D91, F36, F41

Hurricanes: Intertemporal Trade and Capital Shocks

Hurricanes in the Caribbean and Central America represent a natural experiment to test the intertemporal approach to current account determination. The intertemporal approach allows for the possibility of intertemporal trade, via international borrowing. Previous tests of intertemporal current account (ICA) models have typically relied upon the identification of shocks in a VAR framework with which to trace the current account response. Hurricane shocks represent exactly the kind of temporary, country-specific shock required by the theory, allowing for the intertemporal current account response to be estimated without recourse to a VAR shock decomposition. Using data on the economic damages attributable to a hurricane, I estimate the economy`s response to a hurricane-induced capital shock within a fixed effects panel model. The current account response qualitatively conforms to the S-shaped response predicted by the theory, indicating that countries are engaging in intertemporal trade. However, the exact timing and magnitude of the response differs from a standard ICA model`s smooth behavior. A hurricane which destroys capital valued at one year`s GDP pushes the current account over GDP into deficit by 5 percentage points initially. 3-8 years after such a hurricane, the current account over GDP moves into surplus at 2.7 percentage points.

Growth, Expansion of Markets, and Income Elasticities in World Trade

The Houthakker-Magee effect implies that a country facing unfavorable income elasticities in trade must either grow at a slower rate than its trading partners or experience a trend worsening of its current account and/or depreciation of its real exchange rate. Krugman (1989) first documented the existence of a “45-degree rule” under which relative income elasticities are systematically related to relative growth rates. In this paper, we develop and test an intertemporal current account model in which Krugman’s original 45-degree rule is a special case. The result suggests that secular trends in current accounts and/or real exchange rates are much smaller than one would have projected based on conventional income elasticities.

Growth, Expansion of Markets, and Income Elasticities in World Trade

The Houthakker-Magee effect implies that a country facing unfavorable income elasticities in trade must either grow at a slower rate than its trading partners or experience a trend worsening of its current account and/or depreciation of its real exchange rate. Krugman (1989) first documented the existence of a “45-degree rule” under which relative income elasticities are systematically related to relative growth rates. In this paper, we develop and test an intertemporal current account model in which Krugman’s original 45-degree rule is a special case. The result suggests that secular trends in current accounts and/or real exchange rates are much smaller than one would have projected based on conventional income elasticities.

Measuring time-varying capital mobility in East Asia

This paper examines the dynamic capital mobility in East Asia's newly industrialized economies (NIEs). We propose an alternative measure of capital mobility based on an intertemporal current account model that is developed by Shitaba and Shintani [J. Int. Money Financ. 17 (1998) 741]. We present the time-varying parameter estimates to illustrate the different processes of financial liberalization in these developing countries. The results indicate that capital is much more mobile over time, corresponding to the liberalization policies. Our findings are sharply in contrast to the previous studies, which show the lower degree of capital mobility either in developed or in developing countries.

Productivity Shocks, Habits, and the Current Account

Empirical work regarding Intertemporal Current Account (ICA) models has centered around two distinct testing methodologies, present value tests and a productivity shock approach as formulated in Glick and Rogoff (1995). In previous work, Gruber (2001), I have tested an ICA model that allows for habits in aggregate consumption via the present value method. This paper applies the alternative Glick and Rogoff style approach to testing the model. The benefits of doing such are an ability to separate country-specific from worldwide output changes, a distinction of considerable importance, as well as to impose restrictions on the relationship between investment and output, neither of which are possible in the present value framework. The results of the test are supportive of the existence of habits and coincide with the results of Gruber (2001). The degree of habit persistence implied by the model is estimated for the G-7 countries. The paper also proposes habit formation as a possible solution to an empirical puzzle identified in the original Glick and Rogoff paper.

Productivity Shocks, Habits, and the Current Account

Empirical work regarding Intertemporal Current Account (ICA) models has centered around two distinct testing methodologies, present value tests and a productivity shock approach as formulated in Glick and Rogoff (1995). In previous work, Gruber (2001), I have tested an ICA model that allows for habits in aggregate consumption via the present value method. This paper applies the alternative Glick and Rogoff style approach to testing the model. The benefits of doing such are an ability to separate country-specific from worldwide output changes, a distinction of considerable importance, as well as to impose restrictions on the relationship between investment and output, neither of which are possible in the present value framework. The results of the test are supportive of the existence of habits and coincide with the results of Gruber (2001). The degree of habit persistence implied by the model is estimated for the G-7 countries. The paper also proposes habit formation as a possible solution to an empirical puzzle identified in the original Glick and Rogoff paper.

An empirical study on Taiwan's current account: 1961–90

In this paper, a simple intertemporal current account model is developed for a small open economy with imperfect capital markets. The model nests both perfect and imperfect international capital mobilities as its special cases. The model is empirically examined using Taiwan's annual data for the period between 1961 and 1990. Our results show that the model is able to explain some historical movements of Taiwan's trade balance. However, in contrast to many findings from previous studies for other countries, the model is rejected. One important feature of the rejection of the model is that the actual trade balance series is much more volatile than can be explained by the model, this is especially so for the periods when world oil shocks occurred. These results indicates that changes in the terms of trade, which our simple model neglects, might be important factors in Taiwan's current determination.