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.
easily tractable expression for the current account equal to the present discounted value of expected future net income declines. 3
Starting with Sheffrin and Woo (1990) , economists have been eager to put the presentvaluemodel to the test. 4 In order to construct forecasts of income declines that take into account all relevant information available to the agent—and not just to the econometrician—researchers have relied on insights provided by Campbell (1987) and Campbell and Shiller (1987) in different contexts. If the model is a true representation of the
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.
I. I ntroduction
The present-valuemodel 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
, Michael S.
Working Paper No. 01/92
Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?
Becker, Torbjörn I.; Richards, Anthony J.; Thaicharoen, Yungyong
Working Paper No. 01/93
Consumption-Based Interest Rate and the Present-ValueModel of the Current Account:Evidence from Nigeria
Adedeji, Olumuyiwa S.
Working Paper No. 01/94
The Gender Gap in Education in Eritrea in 1991–98: A Missed Opportunity?
Brixiova, Zuzana; Bulir, Ales; Comenetz, Joshua
Working Paper No. 01/95
Globalization and Firms