International Finance Discussion Papers (IFDP)
February 2003
The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects
James M. Nason and John H. Rogers
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
PDF: Full Paper
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