Master's Culminating Experience
The primary aim of this paper is to explore medium-term determinants of the current account across a large sample of countries and compare the results with theoretical predictions of the intertemporal model (ICA). In addition, the purpose is to test hypotheses about the stability of the current account equations across different groups of countries, test the twin deficit hypothesis, the Ricardian equivalence hypothesis, and examine the importance of other theoretically relevant factors for current account determination. Based on a sample of 129 countries over the period 1991 to 2000, one can observe substantial differences between current account models for developing and industrialized countries. Whether developing countries are defined according to GDP per capita or according to credit rating, the hypothesis that they face the same current account model as industrialized countries can be rejected at the 99 percent level of confidence. Whereas the intertemporal model (ICA), particularly after allowing for overlapping generations, appears to be a reasonable framework for explaining the current account in developed countries, no such conclusion can be made about developing countries.
(2005). The Determinants of Current Account Dynamics in the Medium Run: An International Approach. .