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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects
James M. Nason; John H. Rogers
2003-760  (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.

Full paper (686 KB PDF)

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

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