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Dynamics of the current account and interest differentials

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  • Boileau, Martin
  • Normandin, Michel

Abstract

In contrast to earlier work, we study the relation between the current account and interest rate differentials. To do so, we document the relation for international data. We then interpret this relation from a two-country, dynamic, general equilibrium environment. We finally confront the relation predicted by the environment to the relation observed in the data. We find that the environmental correctly predicts that the current account is countercyclical; that the interest differentials is procyclical; and that the current account is negatively correlated with current and future interest differentials, but positively correlated with past interest differentials.
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  • Boileau, Martin & Normandin, Michel, 2008. "Dynamics of the current account and interest differentials," Journal of International Economics, Elsevier, vol. 74(1), pages 35-52, January.
    • Handle: RePEc:eee:inecon:v:74:y:2008:i:1:p:35-52
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    2. Demirel Ufuk D, 2009. "The Transmission of Foreign Interest Rate Shocks to a Small-Open Economy: The Role of External Debt and Financial Integration," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-37, February.
    3. Boileau, Martin & Normandin, Michel, 2008. "Closing international real business cycle models with restricted financial markets," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 733-756, September.
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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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