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The open economy excess sensitivity hypothesis: Theory and Swedish evidence

Author

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  • Adler, Johan

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

Abstract

This paper extends the theory of open economy consumption behavior by applying Flavin's (1993) excess sensitivity hypothesis (ESH) to the current account. The ESH can be interpreted as a generalization of the open economy permanent income hypothesis (PIH) that allows for any degree of international capital mobility. As such, the ESH can account for why the PIH fails and for the related puzzle of an excessively volatile current account. Furthermore, the ESH suggests an alternative approach for assessing a country's degree of international capital mobility. Using annual Swedish data for the period 1951-99, the empirical evidence implies that, in contrast to the PIH, the ESH cannot be rejected.

Suggested Citation

  • Adler, Johan, 2003. "The open economy excess sensitivity hypothesis: Theory and Swedish evidence," Working Papers in Economics 88, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0088
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    File URL: http://hdl.handle.net/2077/2816
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    More about this item

    Keywords

    Excess sensitivity; Permanent income; Consumption; Current account; Capital mobility;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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