The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects

James M. Nason and John H. Rogers
Working Paper 2003-7a
Revised October 2003

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Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the "usual suspects" of nonseparable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. The authors confirm these rejections on postwar Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a "canonical" RBC model moves closest to the data when it features exogenous world real interest rate shocks.

JEL classification: F41, E32

Keywords: current account, present value model, world real interest rate, international capital mobility, Bayesian Monte Carlo

The authors thank the co-editor, Enrique Mendoza, two anonymous referees, Paul Bergin, David Bowman, Michael Dooley, Allan Gregory, Mathias Hoffman, Beth Ingram, Pat Kehoe, Rody Manuelli, Tommaso Monacelli, Gregor Smith, Peter Tinsley, Shaun Vahey, conference participants at the 1999 Summer Meetings of the Econometric Society at the University of Wisconsin-Madison, the 2000 Midwest Macro Meetings at the University of Iowa, and the 2001 International Conference of the Society for Computational Economics at Yale University, and seminar participants at California-Davis, California-Santa Cruz, Cambridge, Georgetown, Québec à Montréal, Queen’s, Simon Fraser, Southhampton, Victoria, Virginia, the Bank of Canada, and the Federal Reserve Board for useful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta, the Board of Governors, or the Federal Reserve System. Any remaining errors are the authors’ responsibility. The appendix to the paper can be found at the end of this paper.

Please address questions regarding content to James M. Nason, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, Georgia 30033, 404-498-8891,, or John H. Rogers, Mail Stop 22, International Finance Division, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, 202-452-2873,