Working Paper
The present-value model of the current account has been rejected: round up the usual suspects
Abstract: Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the \"usual suspects\" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a \"canonical\" RBC model moves closest to the data when it features exogenous world real interest rate shocks.
Keywords: Balance of payments; International finance; Econometric models;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 2003
Number: 760