Should We Trust the Empirical Evidence from Present Value Models of the Current Account?

Benoît Mercereau and Jacques Alain Miniane

No 2008-10, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The present value model of the current account has been very popular, as it provides an optimal benchmark to which actual current account series have often been compared. We show why persistence in observed current account data makes the estimated optimal series very sensitive to small-sample estimation error, making it close to impossible to determine whether the paths of the two series truly bear any relation to each other. Moreover, the standard Wald test of the model will falsely accept or reject the model with substantial probability. Monte Carlo simulations and estimations using annual and quarterly data from five OECD countries strongly support our predictions. In particular, we conclude that two important consensus results in the literature – that the optimal series is highly correlated with the actual series, but substantially less volatile – are not statistically robust.

Keywords: Current account; present value model; model evaluation (search for similar items in EconPapers)
JEL-codes: C11 C52 F32 F41 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:7211

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