Current Account Dynamics: A SVAR Analysis When the
Structural Shocks are not Orthogonal
César R. Sobrino- Universidad del TuraboEmail: [email protected]
Ellis Heath- Valdosta State UniversityEmail: [email protected]
Motivation
• Using Canada and UK, Kano (2008) analyzes the Intertemporal Current Account Approach (ICA).
• For a small open economy:• Current account is independent of global
shocks.• Current account responds positively to a
positive country-specific temporary shock.• Current account does not respond to
country-specific permanent shocks.
Motivation
• Three-variable SVAR with long run restrictions. Blanchard & Quah (1989).
• Ex-ante global real interest rate, net output growth and current account/net output.
• Permanent shocks to those series are the structural shocks.
• The variance-covariance matrix of structural shocks is the identity matrix.
Motivation
• Using a SVAR approach, his findings fit predictions
• But, there two puzzles:– Excessive response of the current
account to country-specific transitory shock.
– Country-specific transitory shocks dominate current account variations in the short and long run, but they do no play any role in net output growth fluctuations.
Motivation
• No correlation assumptions might be determining the Kano’s puzzles.
• Enders and Hurns (2007).– SVAR with long-run restrictions and
structural shocks are correlated at leads.– Idiosyncratic shocks should be
correlated due to fiscal and monetary policies.
Methodology
• Variables– rt: ex ante global interest rate.
– ∆lnNOt: Net output growth
– CA/NOt: either current account over net output growth
In this setup
• 9 unknowns: – three elements of B(0)– The variances of the structural shocks– The covariances of structural shocks
• 7 equations– 6 elements of variance-covariance
matrix of observed residuals.– A long run restriction:
In this setup
• Just identified system ,assuming no correlation between the global shock and idiosyncratic shocks.
• Then, idiosyncratic shocks are correlated at leads.
• Two schemes
Scheme I
• Country specific permanent shock () is previous to the country specific transitory shock ()
– Where delta is a pure demand-side shock
Scheme II
• Country-specific transitory shock )is previous to the country specific permanent shock ()
– Where phi is a pure supply-side shock
Data
• IMF, quarterly 1971:1-2006:2 for Canada and UK– The ex-ante global interest rate is a weighted
average of the ex-ante real interest rate minus the forecasted inflation in the G7 countries.
– The net output is the real GDP minus investment minus government expenses minus stock variation.
– The current account is the real GNP minus consumption minus investment minus government expenses minus stock variation