Understanding the New Zealand current account: A structural approach

Anella Munro and Rishab Sethi

No DP2007/10, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: In this paper we use a small open economy model to identify the causal factors that drive New Zealand's current account. The model features nonseparable preferences, habit in consumption, imperfect capital mobility, permanent productivity shocks, fiscal shocks and two foreign shocks to explore features that are important in understanding the dynamics of the current account. The results suggest that permanent technology shocks and world cost of capital shocks account for the bulk of variation in the current account at short horizons; at longer horizons, external valuation shocks (reflecting terms of trade and exchange rate developments) account for most of the variance. Habit in consumption and a debt-sensitive risk premium are features that improve overall model it as measured by posterior odds ratios. These features, and the contribution of foreign and permanent technology shocks, help to explain why the one shock present value model of the current account fails to appropriately characterise the dynamics of the New Zealand current account, as discussed in Munro and Sethi (2006).

JEL-codes: C51 E52 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mac
Date: 2007-07
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Persistent link: http://EconPapers.repec.org/RePEc:nzb:nzbdps:2007/10

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