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

See all articles by Marianna Belloc

Marianna Belloc

Sapienza University of Rome - Department of Economics

Giancarlo Gandolfo

Accademia dei Lincei; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 28, 2004

Abstract

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

Belloc, Marianna and Gandolfo, Giancarlo, The Current Account-Interest Rate Relation as a Nonlinear Phenomenon (April 28, 2004). Journal of International Trade and Economic Development, Vol. 14, No. 2, pp. 145-166, June 2005, Available at SSRN: https://ssrn.com/abstract=1825370

Marianna Belloc

Sapienza University of Rome - Department of Economics ( email )

Via del Castro Laurenziano 9
Rome, 00161
Italy

Giancarlo Gandolfo (Contact Author)

Accademia dei Lincei ( email )

Via della Lungara 10
Rome, 00165
Italy

HOME PAGE: http://gandolfo.org

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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