Resource title

Should We Trust the Empirical Evidence from Present Value Models of the Current Account?

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Resource description

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 close to impossible to determine whether the paths of the two series truly bear any relation to each other. 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.

Resource author

Benoît Mercereau, Jacques Alain Miniane

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/17982

Resource license

Adapt according to the presented license agreement and reference the original author.