An Econometric Cntribution to the Intertemporal Approach of the Current Account
Wagner Gaglianone () and
João Issler ()
No 178, Working Papers Series from Central Bank of Brazil, Research Department
This paper investigates an intertemporal optimization model to analyze the current account through Campbell & Shiller’s (1987) approach. In this setup, a Wald test is conducted to analyze a set of restrictions imposed to a VAR, used to forecast the current account for a set of countries. We focused here on three estimation procedures: OLS, SUR and the two-way error decomposition of Fuller & Battese (1974). We also propose an original note on Granger causality, which is a necessary condition to perform the Wald test. Theoretical results show that, in the presence of global shocks, OLS and SUR estimators might lead to a biased covariance matrix, with serious implications to the validation of the model. A small Monte Carlo simulation confirms these findings and indicates the Fuller & Battese procedure in the presence of global shocks. An empirical exercise for the G-7 countries is also provided, and the results of the Wald test substantially change with different estimation techniques. In addition, global shocks can account up to 40% of the total residuals of the G-7.
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:178
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