Should We Trust the Empirical Evidence from Present Value Models of the Current Account?

38 Pages Posted: 18 Dec 2010

See all articles by Benoît Mercereau

Benoît Mercereau

Yale University - Department of Economics; International Monetary Fund (IMF)

Jacques Miniane

Johns Hopkins University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2008

Abstract

The present value model of the current account has been very popular, as it provides an optimal benchmark to which actual current account series have often been compared. We show why persistence in observed current account data makes the estimated optimal series very sensitive to small-sample estimation error, making it almost impossible to determine whether the consumption-smoothing current account tracks the actual current account closely, or not closely at all. Moreover, the standard Wald test of the model will falsely accept or reject the model with substantial probability. Monte Carlo simulations and estimations using annual and quarterly data from five OECD countries strongly support our predictions. In particular, we conclude that two important consensus results in the literature - that the optimal series is highly correlated with the actual series, but substantially less volatile - are not statistically robust. --

Keywords: Currrent account, present value model, model evaluation

JEL Classification: C11, C52, F32, F41

Suggested Citation

Mercereau, Benoit and Miniane, Jacques, Should We Trust the Empirical Evidence from Present Value Models of the Current Account? (2008). Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008-34, Available at SSRN: https://ssrn.com/abstract=1726830 or http://dx.doi.org/10.5018/economics-ejournal.ja.2008-34

Benoit Mercereau (Contact Author)

Yale University - Department of Economics ( email )

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International Monetary Fund (IMF) ( email )

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Jacques Miniane

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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