Understanding the Sources of High Current Account Fluctuations in 5 Developed Economies

Ibhagui, Oyakhilome (2015): Understanding the Sources of High Current Account Fluctuations in 5 Developed Economies.

Abstract

The global economy has, in recent times, continued to face large and unprecedented external imbalances. Despite reductions recorded in aggregate current account (saving less investment) to global output ratio, the imbalances still remain. The main contributors to the imbalances have been the world’s developed economies. These developed economies have experienced fluctuating current account balances over the years and the fluctuation has contributed to a slow correction of the imbalances. This paper identifies 5 developed economies with the highest fluctuations in current account balances and analyses the sources of these fluctuations. The countries are Singapore, Latvia, Iceland, Norway and Estonia. Results obtained suggest that 1) temporary shocks account for most current account fluctuations, and the excess response to temporary shocks is as stable and pronounced as in previous studies; 2) permanent shocks drive current account fluctuations in Iceland and Latvia but not in Norway, Estonia, and Singapore; 3) Singapore demonstrates the most support for the two-good intertemporal model, since external supply and demand shocks account for its current account fluctuations

• Item Type: MPRA Paper
• Language: English
• Keywords: Current account fluctuations, two-good intertemporal model, VAR and impulse response, V5 Economies
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Ahmed S. and Park J. H. (1994), Sources of Macroeconomic Fluctuations in Small Open Economies, Journal of Macroeconomics, Vol.16 (1), 1-36.

Aristovnik, A, (2007), “Short- and Medium-Term Determinants of Current Account Balances in Middle East and North Africa Countries,” William Davidson Institute Working Paper No. 862.

Bernanke, B. S., (2005), “The Global Saving Glut and the U.S. Current Account,” Remarks at the Sandridge Lecture, Virginia Association of Economics, Richmond, VA, March.

Backus, D. K.,Kehoe, P. J. and Kydland F. E. (1994). Dynamics of the Trade Balance and the Terms-oftrade: The J-Curve? American Economic Review, 84, 84-103.

Bergin P. R. (2003), Putting the ‘New Open Economy Macroeconomics’ to a test, Journal of International Economics, Vol. 60, 3-34.

Bergin P. R. (2006), How well can the New Open Economy Macroeconomics explain the exchange rate and current account? Journal of International Money and Finance, Vol. 25(5), 675 701.

Bergin P. R. and Sheffrin S. M. (2000), Interest Rates, Exchange Rates and Present Value Models of the Current Account, The Economic Journal, Vol.110 (463), 535-558.

Betts, C.M. and Kehoe, T.J. (2008), Real Exchange Rate Movements and the Relative Price of Non-traded Goods, NBER Working Paper No. 14437.

Blanchard O. J. and Quah D. (1989), The Dynamic Effects of Aggregate Demand and Supply Disturbances, The American Economic Review, Vol.79 (4), 655-673.

Buiter W.H. (2006), Threats to the orderly resolution of global imbalances: trade disputes, abrupt corrections of global asset market anomalies and past, present and future monetary policy errors by the Fed. Working Paper, European Institute, London School of Economics and Political Science.

Caballero, R. J. and Krishnamurthy. A, (2009). “Global Imbalances and Financial Fragility,” American Economic Review, Vol. 99(2), 584-88.

Caballero, R.J, E. Farhi, and P.O. Gourinchas (2008), “An Equilibrium Model of Global Imbalances and Low Interest Rates,” American Economic Review.

Campbell J. Y. (1987), Does saving anticipate declining labour income? An alternative test of the permanent income hypothesis, Econometrica, Vol. 55(6), 1249-1274.

Campbell J. Y. and Shiller R. (1987), Cointegration and tests of present value models, Journal of Political Economy, Vol. 95(5), 1062-1088.

Chinn M. D. and Lee J. (2006), Current Account and Real Exchange Dynamics in the G-7 Countries, Journal of International Money and Finance, Vol. 25(2).

Christopoulos, D.K. and León-Ledesma, M.A. (2009), What did we really know about current account sustainability in the USA? Journal of International Money and Finance, forthcoming.

Dodge. D. (2006), Global imbalances and the Canadian economy, Governor of the Bank of Canada, to the Barbados International Business Association, Bridgetown.

Dornbusch R. (1983), Real interest rates, home goods and optimal external borrowing, Journal of Political Economy, Vol. 91(1), 141-153.

Engel, C. (1999), Accounting for U.S. Real Exchange Rate Changes, Journal of Political Economy, 107, 50738.

Karadimitropoulou, A. and León-Ledesma, M.A. (2009), Sources of Current Account Fluctuations in Industrialised Countries. Studies in Economics from School of Economics, University of Kent.

Kano T. (2008), A Structural VAR Approach to the Intertemporal Model of the Current Account, Journal of International Money and Finance, Vol. 27(5), 757-779.

Lane, P.R. (2001), The New Open Economy Macroeconomics: A Survey, Journal of International Economics, Vol. 54(2), 235-266.

Nason J. M. and Rogers J. H. (2002), Investment and the Current Account in the Short Run and the Long Run, Journal of Money, Credit and Banking, Vol. 34(4), 967-986.

Nason, J.M., and Rogers, J.H. (2006). “The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects.” Journal of International Economics 68: 159–187.

Neely C. J. and Rapach D. (2008), Real Interest Rate Persistence: Evidence and Implications, Federal Reserve Bank of St. Louis, Working Paper Series 2008-018A.

Ng, S., and Perron, P. (2001), Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power, Econometrica, vol. 69, pp. 1519-54.

Obstfeld, M., Rogoff, K., 1995. The intertemporal approach to the current account. In: Grossman, G.M., Rogoff, K. (Eds.), Handbook of International Economics, vol. 3. North Holland Publishing Co., New York, pp. 1731–1799.

Obstfeld M. and Rogoff K. (1996), Foundations of International Macroeconomics, The MIT Press

Otto G. (1992), Testing a present value model of the current account: evidence from U.S. and Canadian time series, Journal of International Money and Finance, Vol. 11(5), 414-430.

Ricci, L.A., Milesi-Ferretti, G.M. and Lee, J. (2008), Real Exchange Rates and Fundamentals: A Cross-Country Perspective, IMF Working Paper No. 08-13.

Smets F. and Wouters R. (2003), An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area, Journal of the European Economic Association, Vol. 1(5), 1123-1175.

Sheffrin S. and Woo W.T. (1990a). Testing an optimizing model of the current account via the consumption function, Journal of International Money and Finance, Vol. 9(2), 220-233.

Sheffrin S. and Woo W.T. (1990b), Present value tests of an intertemporal model of the current account, Journal of International Economics, Vol. 29(3-4), 237-253.

Taylor A. M. (2002), A century of current account dynamics, Journal of International Money and Finance, Vol.21.

Uhlig, H. (2005). What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52, 381-419.

Zhang, Y. and G. Wan (2007). What accounts for China’s trade balance dynamics? Journal of Policy Modelling 29(6), 821-837.