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Mr. Olumuyiwa S Adedeji
This paper presents a model of current account determination, based upon the permanent-income hypothesis. A present-value relationship among the current account, changes in net output, the exchange rate and the terms of trade is derived and the implications of such a relationship are tested using data for Nigeria during 1960-97. This paper presents a model of current account determination, based upon the permanent-income hypothesis. A present-value relationship among the current account, changes in net output, the exchange rate and the terms of trade is derived and the implications of such a relationship are tested using data for Nigeria during 1960-97.
Olumuyiwa S. Adedeji

I. I ntroduction The present-value model of the current account (hereafter PVMCA), a version of the intertemporal model of the current account, has become standard in the theoretical analysis of the current account. This model in its simplest form derives its conclusions from consumption smoothing behavior. It implies that an unanticipated temporary fall in output in a small open economy will produce a deterioration in the current account balance. This approach has its origin in Campbell and Shiller’s (1987) seminal work on the relationship between

Mr. Jacques A Miniane and Benoît Mercereau
Under near-singularity conditions typically generated by persistence in current account data the predictions of present value models become extremely sensitive to small sample estimation error. Moreover, traditional Wald tests will distort the likelihood that the model is true. Using OECD data we find that: (i) the Wald test often leads to the wrong inference compared to a valid test; (ii) in all cases posterior distributions of the predicted series and associated correlation coefficients and variance ratios are very wide. In particular, one cannot draw any firm conclusion regarding excess current account volatility.