Consumption Tilting, Habit Persistence and Precautionary Savings: Are They a New Hope for Current Account Approach?

Abstract

This paper aims to test the current account approach. Four variants of the model are analyzed. The first variant consists of the traditional model due to Sachs [SACHS, J. (1982): "The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, 84, 147-159.].The second variant were proposed by Otto [Otto, G. (1992): "Testing a Present-Value Model of the Current Account: Evidence from the US and Canadian Time Series" Journal of International Money and Finance, 11, 414-430.]. In the second variant the representative agent adjust her consumption not proportionally to change in permanent income and tilts consumption to present or towards future. The third variant the representative has habit persistence but consumes just her permanent income and does not obtain utility from government goods.[Gruber, J. W. (2004): "A Present Value Test of Habits and the Current Account" Journal of Monetary Economics, 51, 1495-1507.] The fourth variant of the current account approach the representative agent has a precautionary motive to save. [Ghosh, A., and J. D. Ostry (1997): "Macroeconomic Uncertainty, Precautionary Saving and the Current Account," Journal of Monetary Economics, 40, 121-139.]. The full implications of the variant of the current account approach with precautionary saving are not rejected for some countries (Uruguay, Canada, Sweden, Japan and New Zealand). The second variant is not rejected for Sweden. The long run implications of consumption tilting model is not rejected for United States. The full implications for all others variants were rejected and the main reason to explain this rejection is that the current account series seems to have a unit root. The analyzed countries are United States, United Kingdom, Australia, Korea, Brazil, Uruguay, Canada, Sweden, Japan, New Zealand and Ireland for the period of 1947-2009 using annual data.

Keywords: Current account approach, cointegration, rational expectation model

JEL Classification: F41, C32, F32