Current Account Dynamics and Degree of Capital Mobility

Abstract

By modeling the current account balances (as a percentage of GDP) in a dynamic AR (1) Model, Taylor (2002) proposed to use speed of mean reversion of the dynamics of the current account as a tool for measurement of capital mobility and confirmed the stylized fact of U-Shape degree of capital mobility through the last two centuries with this new approach. With the assumption that countries obey their Long Run Budget Constraint (LRBC), the OLS estimate of the degree of current account persistency in Taylor (2002) is downward bias due to small sample and high serial correlation of current account ratios with its lags. By correcting these biases with the Andrew's (1993) exact median-unbiased estimation, we find that the confidence intervals for half-life estimates include 1- year (which was used as a benchmark) in 37 out of 75 country-period cases, which cast some doubt on the use of half-life estimate as a practical measure of capital mobility.

Keywords: current account adjustments, capital mobility, current account persistency

JEL Classification: F21, F32