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.
Full paper (1256 KB PDF)
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Last update: July 19, 2001