Present Value Tests of the Current Account with Durables Consumption

Talan B. Iscan ()

Department of Economics at Dalhousie University working papers archive from Dalhousie, Department of Economics

Abstract: The present value tests of intertemporal model of the current account usually assume that all goods are traded and that aggregate consumption decisions can be closely approximated by a random walk process. This paper extends these models by explicitly introducing durables and nontraded goods into an intertemporal model of the current account, and tests the model using Canadian data. Since aggregate consumption expenditures on durables do not exhibit random walk behaviour even when the aggregate consumer has a quadratic utility function, the model that includes durables makes predictions that differ from those of the basic approach. When nontraded goods are also incorporated into the model, the most appropriate income variable becomes output net of nontraded production. These implications are examined using present value tests. The results suggest that introduction of both durables and nontraded goods improves upon the model with (traded) nondurables only. This seems to be due to the combination of durables and nontraded goods, as durables alone do not sufficiently refine the basic model.

Keywords: current account; durables; traded and nontraded goods; Canada (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written
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Related works:
Working Paper: Present Value Tests of the Current Account with Durables Consumption (1999)
Journal Article: Present value tests of the current account with durables consumption (2002)
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