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Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility

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  • Akihisa SHIBATA
  • Mototsugu SHINTANI
  • Takayuki TSURUGA

Abstract

The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account. JEL classifications: E21, F21, F32, F41

Suggested Citation

  • Akihisa SHIBATA & Mototsugu SHINTANI & Takayuki TSURUGA, 2018. "Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility," ESRI Discussion paper series 344, Economic and Social Research Institute (ESRI).
    • Handle: RePEc:esj:esridp:344
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    More about this item

    Keywords

    Capital mobility; Imperfect information; Inattentiveness; Permanent income hypothesis;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • 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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