The Current Account and the Interest Differential in Canada

HEC Montreal Institute of Applied Economics Working Paper No. IEA-04-09

31 Pages Posted: 9 Nov 2004

See all articles by Martin Boileau

Martin Boileau

University of Colorado at Boulder - Department of Economics

Michel Normandin

HEC Montreal - Institute of Applied Economics

Date Written: October 2004

Abstract

For post-1975 Canadian data, we document the joint behavior of output, the current account, and the interest differential at the business cycle frequency. We also interpret the joint behavior using a simple small open economy model. Our simple model assumes that agents have access to world international financial markets, but face country-specific interest rate on their holdings of world assets. The interest differential depends negatively on the country's net foreign asset position. We find that our simple model matches the Canadian data remarkably well.

Keywords: International real business cycle, small open economy, habit formation

JEL Classification: E32, F41, G15

Suggested Citation

Boileau, Martin and Normandin, Michel, The Current Account and the Interest Differential in Canada (October 2004). HEC Montreal Institute of Applied Economics Working Paper No. IEA-04-09, Available at SSRN: https://ssrn.com/abstract=615623 or http://dx.doi.org/10.2139/ssrn.615623

Martin Boileau

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
(303) 492-2108 (Phone)
(303) 492-8960 (Fax)

Michel Normandin (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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