Investment and the Current Account in the Short Run and the Long Run
59 Pages Posted: 6 Nov 2000
Date Written: October 1999
Theoretical models of the relationship between investment and the current account impose restrictions on the joint dynamic behavior of these variables. These restrictions come in two forms. One imposes causal orderings on investment and the current account. The other restriction concerns the permanent responses of these variables to different shocks. We use these restrictions to identify empirically structural shocks from vector autoregressions of investment and the current account for Canada. Under certain identifications, our results support the implications of the intertemporal, small open economy model. However, these results are sensitive to perturbations of the identifications.
Keywords: small open economy, intertemporal model, identification
JEL Classification: F41
Suggested Citation: Suggested Citation