Journal Article

No. 2008-34 | November 06, 2008
Should We Trust the Empirical Evidence from Present Value Models of the Current Account? PDF Icon

Abstract

The present value model of the current account has been very popular, as it provides an optimal benchmark to which actual current account series have often been compared. We show why persistence in observed current account data makes the estimated optimal series very sensitive to small-sample estimation error, making it almost impossible to determine whether the consumption-smoothing current account tracks the actual current account closely, or not closely at all. Moreover, the standard Wald test of the model will falsely accept or reject the model with substantial probability. Monte Carlo simulations and estimations using annual and quarterly data from five OECD countries strongly support our predictions. In particular, we conclude that two important consensus results in the literature – that the optimal series is highly correlated with the actual series, but substantially less volatile – are not statistically robust.

Data Set

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JEL Classification

C11 C52 F32 F41

Citation

Benoît Mercereau and Jacques Miniane (2008). Should We Trust the Empirical Evidence from Present Value Models of the Current Account?. Economics: The Open-Access, Open-Assessment E-Journal, 2 (2008-34): 1—36. http://dx.doi.org/10.5018/economics-ejournal.ja.2008-34

Assessment

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