Current Accounts in the Long Run and the Intertemporal Approach: A Panel Data Investigation

Mario Cerrato, Huseyin Kalyoncu, Naveed Hassan Naqvi and Christopher Tsoukis

The World Economy, 2015, vol. 38, issue 2, 340-359

Abstract: type="main" xml:id="twec12152-abs-0001">

This paper is a theory-based study of the long-run determinants of the current account (CA). For many OECD economies after the Second World War, there has been more long-run variation in the CA data than is emphasised by a ‘Permanent Income’ version of the intertemporal approach that is based on consumption-smoothing and that allows only transitory CA imbalances. A theoretical model of the CA is developed, based on the ‘broader’ variant of the intertemporal approach that stresses the long-term component of the CA. We find that some key theoretical predictions hold, while others fail, validating the approach but also pointing to its limitations.

Date: 2015
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