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Semi-Parametric Predictions of the Intertemporal Approach to the Current Account

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  • M-A. Letendre

Abstract

This paper uses dunamic programming by GMM (DM by GMM) to solve a dynamic model of a small-open economy calibrated to Canada. The predicted paths for consumption, output, investment and trade balance (over output) are highly correlated with thier historical counterparts. Moreover, the variance of the predicted trade balance- output ratio matches the variance observed in the data. The latter result contrasts with earier research on the intertemporal approach to the current account using linear-quadratic modeals that found that the sample paths for the current account predicted by the theory are less volatile than the historical paths in Canadian data. It is shown that a special case of the model with a constant world interest rate does not match the historical path of the trade balance as well.

Suggested Citation

  • M-A. Letendre, 2002. "Semi-Parametric Predictions of the Intertemporal Approach to the Current Account," Department of Economics Working Papers 2002-01, McMaster University.
    • Handle: RePEc:mcm:deptwp:2002-01
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    3. Marc‐André Letendre & Daqing Luo, 2007. "Investment‐specific shocks and external balances in a small open economy model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(2), pages 650-678, May.

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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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