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Interest Rates, Exchange Rates And Present Value Models Of The Current Account

Author

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  • Paul Bergin
  • Steven M. Sheffrin

    (Department of Economics, University of California Davis)

Abstract

This paper develops an intertemporal model of the current account that allows for variable interest rates and exchange rates. These additional variables are channels through which external shocks may influence the domestic current account. We test the restrictions imposed by the theory, using quarterly data from three small open economies. The paper finds that including the interest rate and exchange rte significantly improves the fit of the intertemporal model over what was found in previous studies. the augmented model produces a forecast that better matches the volatility of current account data and better explains historical episodes of current account imbalance.

Suggested Citation

  • Paul Bergin & Steven M. Sheffrin, 2003. "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Working Papers 223, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:223
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    References listed on IDEAS

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    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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