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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
The present-value model of the current account has been rejected: round up the usual suspects
James M. Nason
John H. Rogers
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.


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James M. Nason & John H. Rogers, The present-value model of the current account has been rejected: round up the usual suspects, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 760, 2003.
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Keywords: Balance of payments ; International finance ; Econometric models
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