We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
INTEREST RATES, EXCHANGE RATES AND PRESENT VALUE MODELS OF THE CURRENT ACCOUNT *.
- Authors
Bergin, Paul R.; Sheffrin, Steven M.
- Abstract
The article presents information on a testable intertemporal model of the current account that allows for variable interest rates and exchange rates. This article has examined the question of why simple intertemporal models of the current account have not fared well in tests using data from small open economies. This failure is surprising, inasmuch as the underlying assumptions of the theory should apply especially well in these economies. The authors show that allowing both for a variable interest rate and exchange rate can improve the fit of the model. In some cases movements in the interest rate and exchange rate can explain much of the medium-term movements of the current account from balance that had been unexplained under the simpler intertemporal theory used in earlier tests. This article has offered an explanation for the explanatory power of these additional variables. The current account of a small open economy is likely to be affected not only by shocks to domestic output or government expenditure, but also by external shocks to the economies of large neighbors. Such external shocks should be expected to affect the domestic economy via changes in the world interest rate and the country's real exchange rate, both of which set the terms by which the small open economy can trade intertemporally with the rest of the world.
- Subjects
FOREIGN exchange rates; MONETARY policy; BALANCE of payments; DEMAND for money; VARIABLE interest rates; PUBLIC spending; INTEREST rate swaps
- Publication
Economic Journal, 2000, Vol 110, Issue 463, p535
- ISSN
0013-0133
- Publication type
Article
- DOI
10.1111/1468-0297.00536