Tests of the Present-Value Model of the Current Account: A Monte Carlo Study

Bouakez, Hafedh; Kano, Takashi

doi:10.2139/ssrn.915299

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Tests of the Present-Value Model of the Current Account: A Monte Carlo Study

8 Pages Posted: 15 Jul 2006

See all articles by Hafedh Bouakez

Hitotsubashi University - Graduate School of Economics; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA); Bank of Japan - Institute for Monetary and Economic Studies; Tokyo Center for Economic Research (TCER)

Date Written: May 23, 2006

Abstract

Using a Monte Carlo approach, we evaluate the small-sample properties of four different tests of the present-value model (PVM) of the current account: the non-linear Wald, linear Wald, Lagrange multiplier, and likelihood ratio tests. We find that the non-linear Wald test is biased towards over-rejecting the cross-equation restrictions implied by the PVM, and that the test statistic is uncorrelated with the goodness of fit of the PVM. The three alternative tests are essentially equivalent and are more reliable in evaluating the PVM.

Keywords: Present-value model, Current account, Monte Carlo experiment, Statistical tests

JEL Classification: C15, F32, F41

Suggested Citation: Suggested Citation

Bouakez, Hafedh and Kano, Takashi, Tests of the Present-Value Model of the Current Account: A Monte Carlo Study (May 23, 2006). Available at SSRN: https://ssrn.com/abstract=915299 or http://dx.doi.org/10.2139/ssrn.915299