Prague Economic Papers 2016, 25(6):742-753 | DOI: 10.18267/j.pep.585

Current Account, Consumption and Capital Mobility: An Econometric Approach

Václava Pánková
University of Economics, Prague, Czech Republic (pankova@vse.cz)

This paper is an application of the consumption-smoothing current account theory the main principles of which appeared in the 1980s and gradually broadened to describe the intertemporal dynamics of important economic processes. In open economies, the consumption-smoothing current account process is related to the consumption behaviour of households. The effect on consumption choices and the current account is derived from the premise that households adjust their consumption expenditures according to the terms of trade. The process can be treated in an optimizing framework and originally was strictly connected to the permanent income hypothesis (PIH) and no restrictions to capital mobility. Both assumptions were successively relaxed and relationships allowing incorporation of the excess sensitivity hypothesis (ESH) and not perfect capital mobility have been introduced. Transformed into a VAR model with current account and national cash flow increments as endogenous variables, relevant conclusions are drawn on the basis of Granger causality, the equivalence of the current and predicted current account and an analysis of parameters of the model. Basic relationships and solutions are summarized and an application using the economies of the Czech Republic, Slovakia and Austria follows.

Keywords: current account, permanent income hypothesis, excess sensitivity hypothesis, capital mobility, VAR model
JEL classification: C30, E20, F21, F32

Prepublished online: May 20, 2016; Published: December 1, 2016  Show citation

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Pánková, V. (2016). Current Account, Consumption and Capital Mobility: An Econometric Approach. Prague Economic Papers, 25(6), 742-753. doi: 10.18267/j.pep.585
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