Challenging the Empirical Evidence From Present Value Models of the Current Account

Jacques Miniane and Benoît Mercereau

No 2004/106, IMF Working Papers from International Monetary Fund

Abstract: Under near-singularity conditions typically generated by persistence in current account data the predictions of present value models become extremely sensitive to small sample estimation error. Moreover, traditional Wald tests will distort the likelihood that the model is true. Using OECD data we find that: (i) the Wald test often leads to the wrong inference compared to a valid test; (ii) in all cases posterior distributions of the predicted series and associated correlation coefficients and variance ratios are very wide. In particular, one cannot draw any firm conclusion regarding excess current account volatility.

Keywords: WP; Current account; present value model; model evaluation; variance-covariance matrix; current account volatility; VAR parameter estimate; predicted current account; current account persistence; VAR companion matrix; current account series; correlation coefficient; Personal income; Vector autoregression (search for similar items in EconPapers)
Pages: 30
Date: 2004-06-01
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Citations: View citations in EconPapers (15)

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