ESRI Discussion Paper Series No.344 Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility
Abstract
The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.
- JEL classifications: E21, F21, F32, F41
- Keywords: Capital mobility, Imperfect information, Inattentiveness, Permanent income hypothesis
Structure of the whole text(PDF-Format 1 File)
-
page1Abstract
-
page21 Introduction
-
page42 Evidence
-
page53 The RE models
-
page53.1 Setup
-
page73.2 Characterizing the RE models
-
-
page84 The SI models
-
page84.1 Setup
-
page114.2 Characterizing the SI models
-
page114.2.1 Persistence and volatility of the current account
-
page124.2.2 Persistence of consumption growth
-
page144.2.3 Impulse responses
-
page154.2.4 The hybrid SI model
-
-
-
page165 Assessment of the SI models
-
page165.1 Methodology
-
page185.2 Predictions of the SI models
-
page195.3 Degrees of information rigidity and imperfect capital mobility
-
-
page206 Conclusions
-
page21References
-
page25A Appendix
-
page25A.1 The maximization problem and the optimality conditions
-
page26A.2 Inattentive consumer's saving
-
page27A.3 Proof of Proposition 1
-
page27A.3.1 Derivation of (13)
-
page27A.3.2 Derivation of (14)
-
-
page30A.4 Proof of Proposition 2
-
page30A.4.1 Derivation of (17)
-
page32A.4.2 Derivation of (18)
-
-
page34A.5 Proof of Corollary 6
-
page35A.6 Proof of Proposition 3
-
-
page36Figures
-
page36Figure 1: The current account and changes in consumption
-
page37Figure 2: Impulse response function
-
page38Figure 3: Impact of imperfect capital mobility
-
-
page39Tables
-
page39Table 1: Sample moments of the current account in rich OECD countries(1980-2013)
-
page39Table 2: Theoretical predictions of the RE models
-
page40Table 3: Predictions of the RE models (μ ≠ 0)
-
page41Table 4: Predictions of the SI models (μ ≠ 0)
-
page42Table 5: Estimates of ω and λ and Q(θ) in the SI models
-