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Productivity shocks, budget deficits and the current account

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  • Bussière, Matthieu
  • Fratzscher, Marcel
  • Müller, Gernot J.

Abstract

Productivity shocks and budget deficits are considered to be two key determinants of the current account. In order to assess formally the role of both factors in driving current account movements, the present paper extends the standard intertemporal model of the current account to allow for Non-Ricardian household behavior. Testable cross-equation restrictions for the current account and investment are derived by drawing on the distinction between country-specific and global innovations to productivity as well as to the government budget. We test the restrictions of the model against time series data for 21 OECD countries and find evidence in support of the model.

Suggested Citation

  • Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2010. "Productivity shocks, budget deficits and the current account," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1562-1579, December.
    • Handle: RePEc:eee:jimfin:v:29:y:2010:i:8:p:1562-1579
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    More about this item

    Keywords

    Current account Productivity shocks Budget deficits;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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