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

Authors


  • A previous version of the paper was circulated under the title ‘Industrial production and the intertemporal approach to the current account: Theory and Panel Data Evidence from the OECD’. We would like to thank two anonymous referees of this journal for greatly helping us to improve the paper. Additionally, thanks, but no responsibility, are due to Guglielmo Caporale, Stelios Fountas, George Kapetanios, Joe Pearlman, Keith Pilbeam, Simon Price, Nick Sarantis, Machi Tseloni, Athina Zervoyianni and seminar participants at the University of Macedonia at Thesaloniki, MMF Conference, and the University of Patras for helpful comments. All authors have contributed equally to this work; names appear in alphabetical order.

Abstract

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.

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