Sources of current account fluctuations in Taiwan: 1989–2015

Yu-Hsi Chou and Chun-Yen Tsai ()
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Chun-Yen Tsai: Fu-Jen Catholic University

Empirical Economics, 2021, vol. 60, issue 4, No 20, 2125-2151

Abstract: Abstract In this paper, we use a small open economy model with nontradable goods and time-varying interest rates to investigate the sources of fluctuations in Taiwan’s current account. The correlation coefficient between the implied path of the current account generated from our model and the actual current account data exceeds 0.9, while tests of the cross-equation restrictions also support the model-implied present value relationship between the current account and other macroeconomic variables. We find the consumption smoothing channel, based on the discounted sum of the expected future net output growth, is the main channel for current account adjustment in Taiwan. Expected changes in the real effective exchange rate also account for much of the variation in the current account.

Keywords: Current account; Present value model; Variance decomposition; Consumption smoothing (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00181-020-01829-z

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