A Structural VAR Approach to the Intertemporal Model of the Current Account

Takashi Kano

Staff Working Papers from Bank of Canada

Abstract: The intertemporal current account approach predicts that the current account of a small open economy is independent of global shocks, and that responses of the current account to country-specific shocks depend on the persistence of the shocks. The author shows that these predictions impose cross-equation restrictions (CERS) on a structural vector autoregression (SVAR). To test the CERs, the author develops identification schemes of the SVAR that exploit the orthogonality of the world real interest rate to country-specific shocks as well as the lack of a long-run response of net output to transitory shocks. Tests of the SVAR reveal two puzzling aspects of the Canadian and U.K. current account: (i) the response of the current account to a country-specific transitory shock is too large, and (ii) the fluctuations in the current account are dominated by country-specific transitory shocks that explain almost none of the fluctuations in net output growth.

JEL-codes: F32 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2003
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Citations: View citations in EconPapers (12)

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Journal Article: A structural VAR approach to the intertemporal model of the current account (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:03-42

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