The Current Account-Interest Rate Relation as a Nonlinear Phenomenon
Journal of International Trade and Economic Development, Vol. 14, No. 2, pp. 145-166, June 2005
Posted: 30 Apr 2011 Last revised: 2 May 2011
Date Written: April 28, 2004
The current account-interest rate relationship has been extensively investigated, but always assuming that it is linear. In this paper we examine the linearity versus nonlinearity issue with reference to this relationship in 11 OECD countries, and find overwhelming evidence in favour of nonlinearity. After testing alternative nonlinear specifications, we estimate a smooth transition regression model and a nonlinear VAR model. Finally, we provide a study of the innovation response analysis that shows adjustment behaviours of the two variables. The implications of the results are discussed.
Keywords: Current account, real interest rate, nonlinearity, linearity testing, nonlinear modeling
JEL Classification: F32, E43
Suggested Citation: Suggested Citation