The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects

37 Pages Posted: 24 Jun 2003

See all articles by James M. Nason

James M. Nason

North Carolina State University - Department of Economics

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: February 2003

Abstract

Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the "usual suspects" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a "canonical" RBC model moves closest to the data when it features exogenous world real interest rate shocks.

Keywords: world real interest rate, international capital mobility, Bayesian monte carlo

JEL Classification: F41, E32

Suggested Citation

Nason, James M. and Rogers, John H., The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects (February 2003). FRB International Finance Discussion Paper No. 760. Available at SSRN: https://ssrn.com/abstract=385761 or http://dx.doi.org/10.2139/ssrn.385761

James M. Nason

North Carolina State University - Department of Economics ( email )

Campus Box 8110
NC State University
Raleigh, NC 27695-8110
United States
(919) 513-2884 (Phone)
(919) 515-5613 (Fax)

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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