DOCUMENTOS DE ECONOMIA Y FINANZAS INTERNACIONALES

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1 DOCUMENTOS DE ECONOMI Y FINNZS INTERNCIONLES INTERTEMPORL CURRENT CCOUNT ND PRODUCTIVITY SHOCKS: EVIDENCE FOR SOME EUROPEN COUNTRIES Fernando Perez de Graca Juncal Cuñado prl 2001 socacón Española de Economía y Fnanzas Inernaconales hp://

2 INTERTEMPORL CURRENT CCOUNT ND PRODUCTIVITY SHOCKS: EVIDENCE FOR SOME EUROPEN COUNTRIES Fernando Perez de Graca Juncal Cuñado Unversy of Navarra bsrac: In mos neremporal models of he curren accoun, counry specfc producvy has ambguous effecs on he curren accoun dependng on wheher consumpon effec or nvesmen effec domnaes. The objecve of hs paper s o nvesgae he role of producvy shocks, n combnaon wh nvesmen behavor, as a source for curren accoun dynamcs for some European counres durng he perod We decompose oal producvy shocks beween global and specfc shocks and we examne he role of global and counry specfc producvy shocks for he curren accoun and nvesmen dynamcs. Keywords: curren accoun, producvy shocks, nvesmen JEL classfcaon: C32, F41, F47 Pérez de Graca, Fernando Fac. Económcas Unversdad de Navarra Campus Unversaro Pamplona Pamplona Tfno.: Tfno.: Cuñado, Juncal Fac. Económcas Unversdad de Navarra Campus Unversaro Fax: Fax: E-mal: fgraca@unav.es E-mal: jcunado@unav.es 1

3 The neremporal approach o he curren accoun s becomng ncreasngly sandard n nernaonal macroeconomcs. Ths neremporal model has been exended n many drecons n he heorecal leraure, o nclude nvesmen, governmen spendng, varable neres raes, nonraded goods, producvy shocks, and moneary polcy. 1 ccordng o Obsfeld and Rogoff (2000), he Feldsen-Horoka puzzle s one of he sx major puzzles n nernaonal macroeconomcs. Feldsen and Horoka (1980) found a hgh correlaon beween long erm savng and nvesmen of OECD counres and he coeffcen of a regresson of nvesmen on savng s close o uny. Ths resul s surprsng because seems a odds wh large and perssen exernal mbalances ha have been observed n OECD economes, as well as ndcaons of large gross and ne capal flows n hese economes snce he 1970s. In hs paper we sudy he relaonshp beween producvy shocks and he curren accoun. The response predced by economc heory of a gven counry s curren accoun o a parcular ype of shock depends on he specfc way n whch he economc neracons beween counres are modeled. Suppose a relavely smple dynamc wo counry world economy wh one comsumpon good. In hs model, he effec of a emporary ncrease n producvy n one counry on ha counry s curren accoun s ambguous. On he one hand, he shock emporarly ncreases ha counry s ncome causng o lend o he res of he world n order o smooh consumpon over me. On he oher hand, o he exend ha he shock s perssen wll nduce ha counry o borrow from he res of he world o fnance a emporary nvesmen boom. The frs effec pushes he counry s curren accoun oward surplus whle he second pushes oward defc. The overall response of he curren accoun hen depends on he magnudes of hese wo conflcng effecs wh he key ssue beng he perssence of he shock. Of course, hs dscusson has focused on he effecs of a counry-specfc shock. In hs model, assumng counres are symmerc a common 1 The neremporal approach o he curren accoun has many conrbuons ha ncludes Buer (1981), Sachs (1981,1982), Obsfeld (1982), Dornbusch (1983), Svensson and Razn (1983), Persson and Svensson (1985), and Frenkel and Razn (1987) among ohers. These conrbuons are surveyed n Obsfeld and Rogoff (1995, 1996) and Lane (1999). 2

4 producvy shock wll rase nvesmen n boh counres bu wll no lead o a change n eher counry s curren accoun. 2 Several approxmaons have been proposed o sudy he ncdence of producvy shocks on he curren accoun n an open economy (Glck and Rogoff (1995), Hoffman (1999), Nason and Rogers (1999), Gregory and Head (1999), Iscan (2000)). The objecve of hs paper s o nvesgae he role of producvy shocks, n combnaon wh nvesmen behavor, as a source for curren accoun dynamcs. We decompose oal producvy shocks beween global and specfc shocks and we examne he role of global and counry specfc producvy shocks for he curren accoun dynamcs usng a srucural economerc model derved from he heory. Ths dsncon beween global and specfc shocks s essenal. If a shock hs all counres n he world symmercally, he curren accoun effec wll be much smaller han f hs jus one small counry. The paper s organzed n he followng way. Secon 1 summarzes he economc leraure abou shocks o producvy and he curren accoun - nvesmen behavor whle Secon 2 presens he basc feaures of he neremporal curren accoun model. Secon 3 uses hs model o sudy how nvesmen and he curren accoun respond o dfferen producvy shocks. Fnally, Secon 4 provdes some concludng remarks. 1. Producvy versus curren accoun nvesmen dynamcs In an nfluenal sudy, Feldsen and Horoka (1980) esed he nuvely appealng proposon ha n fully negraed world capal markes, here s no correlaon beween a naon s savng rae and s rae of nvesmen. 3 Feldsen and Horoka (1980) found a hgh correlaon beween long erm savng and nvesmen of OECD counres and he coeffcen of a regresson of nvesmen on savng s close o uny. Ths resul, whch holds n boh cross-secon and me seres daa, s surprsng because seems a odds wh large and perssen exernal mbalances ha have been 2 Ths model s descrbed n Secon 2. 3 If capal s perfecly mmoble across counres, he curren accoun s always zero and hus savng always equals nvesmen. On he oher hand, f capal mobly s perfec, nvesmen changes can be ndependen of savng changes. 3

5 observed n OECD economes, as well as ndcaons of large gross and ne capal flows n hese economes snce he 1970s. 4 However, subsequen heorecal work usng explc models has demosraed ha such fndngs poenally can be conssen wh he neremporal heory and capal mobly (see Fnn (1990) and Baxer and Crucn (1993)). Followng Baxer and Crucn f a counry experences a posve echnology shock a he same me as he res of he world, wll be unable o borrow abroad o augmen s capal sock, gven ha he res of he world wshes o do he same. Despe perfec capal mobly, any rse n nvesmen n hs case mus be fnanced by a rse n savng, as households smooh consumpon over he emporary rse n oupu. Such models can explan he savng-nvesmen correlaons and he curren accoun nvesmen correlaons ypcally observed n he daa. Because he effecs of shocks on he curren accoun may be ambguous, emprcal analyss has ofen focused on he relaonshp beween nvesmen flucuaons and he curren accoun. ddonally, several approxmaons have been proposed recenly o sudy he ncdence of producvy shocks on he curren accoun and nvesmen n an open economy (Glck and Rogoff (1995), Hoffman (1999), Nason and Rogers (1999), Gregory and Head (1999), Iscan (2000)). Glck and Rogoff (1995) have nroduced an nnovave approach o sudy macroeconomcs relaonshps n an open economy. Ther approach nvolved dervng analycally racable curren accoun and nvesmen equaons when here are global and counry-specfc producvy shocks. In a nushell her model makes wo predcons. Frs, counry-specfc producvy shocks affec he curren accoun more han nvesmen, because boh consumpon and nvesmen respond o 4 varey of explanaons have been offered o reconcle Feldsen - Horoka s fndngs of a hgh coeffcen wh a hgh degree of capal mobly. One explanaon s ha esmaes are conamnaed by smulaneous equaon bas, because of he endogeney of boh nvesmen and savng. noher explanaon s ha he Feldsen Horoka sample was oo shor o capure ncreases n capal mobly. hrd explanaon s ha reggresons of nvesmen and savng are beng nerpreed ncorrecly. Obsfeld (1986) pons ou ha a hgh coeffcen n nvesmen-savng regressons may reflec he nfluence of a common facor, such as economc growh, on boh savng and nvesmen. In hs spr Baxer and Crucn (1993) proposed ha producvy shocks relae savng o nvesmen. They also show ha savng-nvesmen correlaons wll be larger n larger 4

6 changes n producvy nducng a larger response by he curren accoun. 5 Second, global producvy shocks have no mpac on he curren accoun because, n he face of he global shocks, counres wh smlar endowmens and echnologes adjus her consumpon and nvesmen symmercally. Nason and Rogers (1999) exend he approach o a srucural VR of frs dfferences n he curren accoun and nvesmen. They ls a se of sx resrcons mpled by neremporal models; some of hese resrcons are used o acheve denfcaon of he model, and he model s esed usng he remanng overdenfyng resrcons. Under ceran denfcaons, her resuls suppor he mplcaons of he neremporal, small open economy. However, hese resuls are sensve o perurbaons of he denfcaons. Gregory and Head (1999) esmae counry-specfc componens n producvy and nvesmen so ha hey can evaluae her effecs on her counres curren accouns. Specfcally, hey use dynamc facor analyss and kalman flerng echnques o esmae common and counry-specfc componens n oal facor producvy, nvesmen, and he curren accoun for he G7 counres. Ther emprcal analyss fnds ha for he G7 counres here are sgnfcan common movemens n boh producvy and nvesmen. These common movemens are assocaed wh curren accoun flucuaons only for he US and France. In conras, counry-specfc ncreases n nvesmen are assocaed wh sgnfcan deeroraons of he curren accoun for all counres excep he US. Fnally, Iscan (2000) exends he analycal framework lad ou by Glck and Rogoff (1995) o an economy wh raded and nonraded goods and he analzes he mpac of counry-specfc and global producvy shocks on he curren accoun and he nvesmen. He fnds ha he curren accoun counres. lhough hese argumens explan how a coeffcen of close o uny may arse n nvesmensavng regressons, hey also mply ha savng and nvesmen conan no nformaon abou capal mobly. 5 Noe ha only counry-specfc producvy shocks exer a szable mpac on he curren accoun. The reason s ha f an ncrease n producvy s generalzed o all he counres, hen all consumers wll smulaneously ry o dssave. Ths enals an ncrease n he real neres rae ha resores equlbrum beween savng and nvesmen, wh no effec each counry s curren accoun. Such a resul holds precsely when all counres are symmerc. When hs s no he case, a global producvy shock wll affec each counry s curren accoun. However, he resul ha counry-specfc shocks should have a larger mpac on he curren accoun han 5

7 responds more han nvesmen o counry-specfc raded producvy growh. ddonally, he suggess ha global raded producvy and counry specfc nonraded producvy growh have no effec on he curren accoun, bu hey have a sgnfcan mpac on nvesmen. He shows ha he global componen of nonraded producvy s neglgble and has no sgnfcan mpac on eher he curren accoun or nvesmen. 2. The small open economy model In hs Secon we summarzes he Glck and Rogoff (1995) model. Glck and Rogoff (1995) use a one-good, small counry model wh adjusmen cos o nvesmen and quadrac uly. The represenave agen maxmzes where ( C ) E β U + (1) = 0 U h 2 C 2 = C (2) subjec o he neremporal budge consran F = rf + y C +1 (3) where F denoes foregn asses energ perod, y s he ne oupu defned as he dfference beween GDP and nvesmen, y =Y -I and C s consumpon. For smplcy, we assume β=1/r. The curren accou s hen gven by he change n he ne foregn asse poson, C =F. Equvalenly, defnng savng as S=Y-C+rF we ge he convenonal defnon of he curren accoun, C=S-I. The producon sde of he economy s descrbed by Cobb-Douglas ype producon funcon gven by Y = C W K γ g I 1 2 K 2 (4) global shocks sll holds rue on he grounds ha he laer end o move he world real neres rae n such a way as o resore equaly beween naonal savngs and nvesmen. 6

8 7 where K s he capal sock a me, γ s he capal share of he economy, C and W are he me- counry-specfc producvy shock and global producvy shock respecvely. The erm (I 2 /K ) capures adjusmen coss n changng he capal sock and g s a posve consan. The nvesmen s defned K K I = +1 (5) Takng a lnear approxmaon o he frs order condon yelds a sysem of equaons of he followng form C K I K I Y α α α + + = (6) ( ) C C E E I I = + = λ η β (7) + = = r y E F r r C (8) Followng Glck and Rogoff (1995), s assumed ha = ( C, W ) s a vecor of counry specfc ang global oal facor producves whch follows an R(1)-process + = = W C GR W C ε ε ρ (9) where ε C and ε W are uncorrelaed. From equaons (6), (7), (8) and ρ GR =1, s he possble o derve he esmable equaons ( ) W C I I + + = β β β (10) W C I C + + = γ γ γ (11) 3. Emprcal nalyss In hs Secon, we examne he effec of producvy shocks on boh curren accoun and nvesmen for 15 European counres for he perod Wh hs purpose, we defne he curren accoun as he dfference beween real savng and nvesmen raes n percen of GDP, and he oal facor producvy from a Cobb-Douglas producon funcon. The global producvy

9 measure s formed by akng a GDP-weghed average of he 15 ndvdual European counry measures, and he counry-specfc componen s formed as he devaon from he global weghed average. 6 Frs we plo all he varables n our analyss. s a second sep of he emprcal analyss, un roo ess have been carred ou. Fnally, we sudy he role of producvy shocks n he curren accoun and nvesmen dynamcs frs look a he daa Before urnng o he esmaes of srucural equaons for he curren accoun and nvesmen, s helpful o look a he daa. Fgure 1 shows he evoluon of he curren accoun for each of he analyzed counres durng he perod s far as he curren accoun behavor s concerned, we observe ha he numerous curren accouns reversals (.e. epsodes of perssen change n he dynamcs of he curren-accoun balance) documened n some emprcal papers are also evden n he case of he European counres (see, for example, Belgum, France or Ireland n 1981, Fnland or Sweden n 1991 among ohers). (Inser Fgure 1) Fgures 2 and 3 dsplay he oal facor producvy n levels () and he counry-specfc producvy levels ( C ) n he 15 counres n our sample, respecvely. Lookng a he Fgure 2 seems ha here are wo dsnc perods for mos of he counres, he frs from he begnnng of 1960 o aproxmaely 1980 and he laer from 1980 o he end of The nal upward rend reversed n md 1970 and dessaceleraed durng 80s. s can be seen n Fgure 3 here are dfferen paerns n counry-specfc producvy levels. For example, he counry-specfc producvy ncreases n he cases of Belgum, Span, France, Ireland, Ialy, Luxembourg, usra, Porugal and Fnland, suggesng ha he producvy growh n hese counres s hgher han he global producvy growh, and decreases for Denmark, Germany, Neherlands, Sweden and Uned Kngdom. (Inser Fgures 2 and 3) 6 See Daa ppendx for a more dealed defnon of he varables. 8

10 Fgure 4 plos growh raes for counry-specfc producvy and Fgure 5 hghlghs he evoluon of nvesmen as a percenage of GDP over he pas 40 years. I s remarkable ha mos of he counres experenced wo sharp reducons n nvesmen raes n mds 80s and 90s. (Inser Fgures 4 and 5) 3.2. Un roo and reversals In hs Secon we sudy he saonary of all he relevan varables n our analyss. The saonary of he curren accoun (C ) s mporan o he valdy of he neremporal model of he curren accoun. Theorecally, he neremporal model of he curren accoun deermnaon combnes he assumpons of perfec capal mobly and consumpon smoohng behavor o predc ha curren accoun acs as a buffer o smooh consumpon n he face of shocks. Ths approach mples ha he curren accoun wll ypcally be a saonary sere. 7 Emprcally, a large volume of leraure es he saonary of he curren accoun, bu hs characersc s no an evden resul, specally when radonal un roo ess are conduced (evdence on C beng generaed by I(1) processes has been provded among ohers by Gundlach and Snn (1992), Glck and Rogoff (1995), Bagna and Manzocch (1996), Hoffman (1999) and Bergn (2000) among ohers). However, he saonary of hs varable s assumed n several papers, such as Sheffrn and Woo (1990), Oo (1992), Mlbourne and Oo (1992), Persan (2000), Bergn and Sheffrn (2000), Wu (2000). In hs paper, we wll assume he saonary of he curren accoun varables based on boh he mplcaons of he neremporal curren accoun model and he resuls of applyng un roo ess allowng for srucural breaks or reversals, common epsodes n hese varables as documened n he prevous Secon and oher emprcal sudes. 7 If nvesmen and savngs can be characerzed by I(1) processes, hen he neremporal approach mposes a conegrang relaonshp on he daa: he curren accoun wll have o be saonary as can be represened as he dscouned sum of changes n ne oupu. s ne oupu s self assumed o be an I(1) process, s dfferences wll be I(0) and so wll be he curren accoun. s nvesmen and savngs are I(1), here s a conegrang relaonshp beween hem. 9

11 Tha s, n hs Secon we use a esng procedure for srucural break n unvarae me seres wh unknown change pon, 8 based on Bagna and Manzocch (1996) and as llusraed by he followng equaon: C = µ + β C -1 + δ1(>t B ) + ζ(-t B )1(>T B ) + e (12) Where α, β, δ, ζ and µ are consan parameers, 1(.) s he ndcaor funcon ha akes value one f he even n brackes occurs and zero oherwse, T B s he break dae (unknown a pror), and e and..d. nose. The δ and ζ parameers measure he shfs occurrng n he perod T B n he nercep and slope of he process respecvely (see Table 1). (Inser Table 1) We apply he sascs of Zvo and ndrews (1992), whch es he null of a un roo condonal on he presence of a srucural break n he deermnsc rend. We es agans a break n he nercep (δ 0), and slope (ζ 0). The resuls of he un roo and srucural break es are lsed n Table 2. ccordng o hs able, when radonal un roo ess are appled, we rejec he null hypohess of un roo for only seven of he 15 counres, whle when we allow for a srucural break, he resuls sugges ha hese varables follow saonary processes. (Inser Table 2) s regards he srucural breaks are concerned, we can compare our chronology of curren accoun reversals wh he resuls of prevous sudes. Take for example he fndngs provded by Freund (2000). She found he followng reversals epsodes: usra 1980, Belgum 1981, Denmark 1986, 8 Ths problem has been addressed wh even-sudy mehodoloy or ad hoc emprcal crera and hese approaches do no lead o a correc dscrmnaon beween ransory and permanen phenomena. The mehodology of even sudy uses a pror nformaon concernng only known epsodes of exernal crss (Corbo and Hernandez, 1996). Oher economss sugges ad hoc crera for reversal denfcaon based on daa analyss. For example, Mles-Ferrre and Razn (1997) argue ha a curren accoun reversal occurs a me T f he sample average from T+1 o T+3 of C exceeds he sample average from T-3 o T-1 by 3 o 5 percen pons. 10

12 Fnland 1991, Greece 1985, Ireland 1981, Ialy 1981 and 1982, Porugal 1981, Span 1981, Sweden 1982 and 1992 and he Uned Kngdom s far as he nvesmen raes and producvy levels are concerned, we canno rejec he null hypoehss of un roo n any of he cases. However, when counry specfc producvy levels are analyzed, we agan have mxed resuls usng Phllps-Perron un roo ess, so ha Zvo-ndrews ess are also appled. In hs case, we wll also assume ha hese varables follow a saonary process Explanng he curren accoun and nvesmen dynamcs In hs Secon we frs esmae he relaonshp beweeen producvy shocks and curren accouns and hen, he producvy shocks nvesmen relaonshp. ccordng o he prevous resuls, we specfy he followng equaons: C = α * α C, W, C, 0 1C D 5D + 6D * W, (13) I = α * α C, W, C, 0 1 I D 5D + 6D * W, (14) were represens he counry, represens he observaon year, C s he curren accoun as percenage of GDP, I s nvesmen as percenage of GDP, C s counry specfc producvy and W s global producvy. s we have seen n Table 2, many reversals ook place n he las wo decades. In oder o capure he mpac of he reversals n our analyss we nroduce hree addonal varables: D s a dummy varable ha akes value 1 afer he break (usually, 1980), C *D and W *D are mulplcave dummy varables. The esmaed coeffcens of C whch are shown n Table 3, column 3 are sgnfcanly dfferen from cero and negave for Germany, Ireland, Neherlands and sgnfcanly dfferen from cero and posve for Fnland. Correspondng coeffcens of C *D80 whch are n column 6 are sascally 9 ccordng o Freund (2000) four crera mus be me o have an epsode ha qualfes as a reversals. They are: he curren accoun defc exceeded 2% of GDP before reversal, he average defc was reduced by a leas 2% of GDP over 3 years (from he mnmum o he hree year average), he maxmum defc n he 5 years afer reversal was no larger han he mnmum defc n he 3 years before he reversal, he curren accoun was reduced by by a leas one hrd. 11

13 sgnfcan for Belgum, Denmark, France, Ireland, Luxembourg and Porugal. s we can see, he mpac of hs componen s no sascally sgnfcan for all counres. ccordng o Gregory and Head (1999) he esmaes of hs parameer may vary subsanally across counres n boh sgn and magnude. They nerpreed nsgnfcan esmaes of α 2 as suggesng ha savng/consumpon smoohng effec s no very pronounced. Ths s n accordance wh he fndng of Backus and Kehoe (1992) and Bakus e al. (1992) ha for mos developed counres he rade balance s couner-cyclcal. If he savng/consumpon smoohng effec were large, hen would consue a pro-cyclcal force n he curren accoun. The above resuls sugges ha savng/consumpon smoohng effec n Belgum, Denmark, Germany, France, Ireland, Luxembourg, Neherlands and Porugal are no are no very pronounced and her curren accouns are hus couner cyclcal. (Inser Table 3) ddonally, he esmaed coeffcen of counry specfc producvy n equaon (14) ( C or D * C ) are sascally sgnfcan only for Belgum, Denmark, Ireland, Ialy, Luxembourg, Porugal, Fnland, Sweden and he UK (see columns 3 and 6 n Table 4), whch suggess ha counry specfc producvy shocks affec he curren accoun more han nvesmen, a resul whch s n accordance wh he leraure (see Glck and Rogoff (1995)). (Inser Table 4) 4. Conclusons The neremporal approach o curren accoun s becomng ncreasngly samdard n nernaonal macroeconomcs. In hs paper we have addressed he queson of wheher exogenous producvy shocks are assocaed wh curren accoun and nvesmen dynamc for some European counres durng he perod The man resuls are he followng. Frs, we fnd evdence of reversals or srucural breaks n he behavour of curren accoun varables for he European counres, occurrng n mos of he cases around llowng for hese breaks, we oban ha hese varables follow saonary processes, as suggesed by he neremporal curren accoun model. Second, we fnd a negave relaonshp beween specfc producvy levels and curren 12

14 accouns n he cases of Belgum, Denmark, Germany, France, Ireland, Luxembourg, Neherlands and Porugal, whch suggess ha he curren accouns of hese counres are couner-cyclcal. ccordng o he leraure, hs suggess ha he savng/consumpon smoohng effec ( nduces he counry o lend o he res of he world n order o smooh consumpon over me) s less pronounced han he nvesmen effec ( nduces he counry o borrow from he res of he world o fnance an nvesmen boom). In conras, he curren accouns of some counres such as Greece, Span, Ialy and usra do no respond a specfc producvy changes. Thrd, he resuls ndcae ha counry-specfc producvy shocks affec he curren accoun more han nvesmen. ccordng o he leraure, hs mples ha boh consumpon and nvesmen respond o changes n producvy nducng a larger response by he curren accoun. Fnally, he response of curren accoun varables o changes n specfc producvy s hgher afer 1980 for many of he counres, a perod of mporan shfs n he curren accoun of many of he counres (Belgum, Denmark, France, Ireland or Neherlands, for example, suffer permanen mprovemens of her curren accoun balance o GDP rao). The analyss of why hese reversals occur and her relaonshp wh producvy shocks consues one of he objecves of fuure research. 13

15 References Backus, D.K. and P.J. Kehoe (1992): Inernaonal evdence on he hsorcal properes of busness cycles, mercan Economc Revew 82, pp Backus, D.K., Kehoe, P.J. and F.E. Kydland (1995): Inernaonal real busness cycles, Journal of Polcal Economy 101, pp Bagna,. and S. Manzocch (1996): Un roo ess of capal mobly n he less developed counres, Welwrschaflches rchv 132, pp Bagna,. and S. Manzocch (1999): Curren accoun reversals n developng counres: he role of fundamenals, Open Economes Revew 10, pp Baxer, M. and M.J. Crucn (1993): Explanng savngs-nvesmen correlaons, mercan Economc Revew 83, pp Bergn, P.R. (2000): How well can we explan he curren accoun n erms of opmzng behavor?, UCD-mmeo. Bergn P.R. and S.M. Sheffrn (2000): Ineres raes, exchange raes and presen value models of he curren accoun, Economc Journal 110, pp Buer, W.H. (1981): Tme preference and nernaonal lendng and borrowng n an overlappng generaons model, Journal of Polcal Economy 89, pp Corbo, V. and L. Hernandez (1996): Macroeconomc adjusmen o capal nflows: lessons from recen Lan mercan and Eas san experence, World Bank Economc Revew 11, pp Dornbusch, R. (1983): Real neres raes, home goods and opmal exernal borrowng, Journal of Polcal Economy 91, pp Feldsen, M. and C. Horoka (1980): Domesc savng and nernaonal capal flows, Economc Journal 105, pp Fnn, M. (1990): On savngs and nvesmen dynamcs n a small open economy, Journal of Inernaonal Economcs 29, pp Frenkel, J.. and. Razn (1987): Fscal polces and he world economy: an neremporal approach, Cambrdge, M: MIT Press. Freund, C.L. (2000): Curren accoun adjusmen n ndusralzed counres, Board of Governors of he Federal Reserve Sysem, Inernaonal Fnance Dscusson Papers, n Ghosh,.R. (1995): Inernaonal capal mobly among he major ndusral counres: oo lle or oo much?, Economc Journal 105, pp Glck, R. and K. Rogoff (1995): Global versus counry-specfc producvy shocks and he curren accoun, Journal of Moneary Economcs. 35, pp Gregory,.W. and.c. Head (1999): Common and counry-specfc flucuaons n producvy, nvesmen, and he curren accoun, Journal of Moneary Economcs 44, pp Gundlach, E. and S.Snn (1992): Un roo ess of he curren accoun balance: mplcaons for nernaonal capal mobly, ppled Economcs 24, pp Hoffmann, M. (1999): Curren accoun and he perssence of global and counry-specfc shocks: s nvesmen really oo volale?, European Unversy Insue, WP Iscan, T.B. (2000): The erms of rade, producvy growh and he curren accoun, Journal of Moneary Economcs 45, pp Lane, P.R. (1999): The new open economy macroeconomcs: a survey, CEPR Dscusson Paper n Mlbourne, R. and G. Oo (1992): Consumpon smoohng and he curren accoun, usralan Economc Papers 31, pp Mles-Ferrer, G.M. and.razn (1997): Sharp reducons n curren accoun defcs: an emprcal analyss, NBER workng paper n

16 Nason, J.M. and J.H. Rogers (1999): Invesmen and he curren accoun n he shor and he long run, mmeo, Unversy of Brsh Columba. Obsfled, M. (1982): ggregae spendng and he erms of rade: s here a Laursen Mezler effec?, Quaerly Journal of Economcs 97, pp Obsfled, M. (1986): Capal mobly n he world economy: heory and measuremen, Carnege Rocheser Conference Seres on Publc Polcy 24, pp Obsfeld, M. and K. Rogoff (1995): The neremporal approach o he curren accoun, n Handbook of Inernaonal Economcs, Grossman, G.M. and K.Rogoff, eds., Norh-Holland Publshng, New York. Obsfeld, M. and K. Rogoff (1996): Foundaons of Inernaonal Macroeconomcs, Cambrdge, M: he MIT Press. Obsfeld, M. and K. Rogoff (2000): The sx major puzzles n nernaonal macroeconomcs: s here a common cause?, NBER workng paper, Oo, G. (1992): Tesng a presen value model of he curren accoun: evdence from US and Canadan me seres, Journal of Inernaonal Money and Fnance 11, pp Perron, P. (1989): The grea crash, he ol prce shock, and he un roo hypohess, Economerca 57, pp Persson, T. and L. Svensson (1985): Curren accoun dynamcs and he erms of rade: Harberger- Laursen-Mezler wo generaons laer, Journal of Polcal Economy XCIII, pp Persan, G. (2000): Curren accoun dynamcs and expeced fuure budge defcs: some nernaonal evdence, Journal of Inernaonal Money and Fnance 19, pp Sachs, J.D. (1981): The curren accoun and macroeconomc adjusmen n he 1970s, Brookngs Papers n Economc cvy, pp Sachs, J.D. (1982): The curren accoun n he macroeconomc adjusmen process, Scandnavan Journal of Economcs 84, pp Sheffrn, S.M. and W.T. Woo (1990): Presen value ess of an neremporal model of he curren accoun, Journal of Inernaonal Economy 29, pp Shbaa,. and M. Shnan (1998): Capal mobly n he world economy: an alernave es, Journal of Inernaonal Money and Fnance 17, pp Sock, J.H. (1994): Un roos, srucural breaks and rends, n R.F. Engle and D.L. McFadden (eds.) Handbook of Economercs, mserdam: Elsever, pp Svensson, L. and. Razn (1983): The erms of rade and he curren accoun: he Harberger- Laursen-Mezler effec, Journal of Polcal Economy XCI, pp Zvo, E. and D.W.K. ndrews (1992): Furher evdence on he grea crash, he ol prce shock and he un roo hypohess, Journal of Busness and Economc Sascs 10, pp Wu, J.-L. (2000): Mean reverson of he curren accoun: evdence from he panel daa un roo es, Economc Leers 66, pp

17 Daa ppendx The daa used n hs sudy are obaned from nnual Macro Economc Daa Base (MECO). The counres ncludes n he sudy are Germany, Belgum, usra, Span, Fnland, France, Ireland, Ialy, Luxembourg, Porugal, Uned Kngdom, Neherlands, Denmark, Greece and Sweden. The daa are annual from 1960 o The varables are: - Toal facor producvy, calculaed from a Cobb-Douglas producon funcon: Y = K L α 1 α (.1) where Y s he producon, proxed by he ndex of GDP a 1995 marke prces (1960=1), K s he ndex of ne capal sock a 1995 marke prces (1960=1), L s he ndex of oal employmen (full me equvalens or persons) and (1-α) s proxed by he average of he real un labour cos over he sascal perod. From he equaon (.1), we oban he oal facor producvy () as: = exp Y [ α ln K + (1 α) ln L] (.2) - Curren accoun daa are consruced by subracng gross fxed capal formaon from gross savng. Boh varables were deflaed usng he gross fxed capal formaon prce deflaor. C = S I (.3) In order o avod heeroscedascy problems, he curren accoun n percen of GDP s obaned dvdng (.3) by GDP a consan prces. - The global producvy measure s formed by akng a GDP-weghed average of he 15 ndvdual European counry measures (.2), and he counry-specfc componen s formed as he devaon from he global weghed average. The weghs were consruced from each counry s share of oal GDP (measured n PPS) n year 1975, as n Glck and Rogoff (1995). - The counry-specfc producvy s calculaed by subsracng he GDP-weghed average of he 15 ndvdual-counry measures from he ndvdual-counry TFP growh rae as dd Glck and Rogoff (1995) and Iscam (2000). 16

18 - TBLE 1. Fve DGP srucures consdered by he esng procedure Descrpon Parameerzaon (a) I(0) whou srucural break α < 1; β = δ = ζ = 0 (b) I(0) wh srucural break α < 1; β = ζ = 0 (c) Trend saonary whou srucural break α < 1; δ = ζ = 0 (d) Trend saonary wh srucural break (segmened rend process) α < 1 (e) I(1) α = 1; β = δ = ζ = 0 17

19 TBLE 2. Un roo ess: Phllps Perron (PP) and Zvo and ndrews (Z) Curren ccoun Invesmen PP Z# T B I(1) vs I(0) I(2) vs I(1) Belgum a -4.32** (1981) -5.05** Denmark -3.41* c -3.90* (1989) ** Germany -2.45** a -4.14** (1985) ** Greece -3.99** c -4.23** (1980) ** Span -3.07** b -5.81** (1980) ** France -1.77* a -5.03** (1982) -2.61* -3.46** Ireland a -4.06** (1984) ** Ialy c -4.61** (1992) ** Luxembourg c ** Neherlands c -4.32** (1994) ** usra c -5.32** (1992) ** Porugal ** (1984) ** Fnland -1.86* a -5.76** (1987) ** Sweden a -6.22** (1991) ** UK -2.44** a -5.07** (1992) ** Global TBLE 2 (Con.) Un roo ess: Phllps Perron (PP) and Zvo and ndrews (Z) Producvy levels Specfc producvy I(1) vs I(0) I(2) vs I(1) I(1) vs I(0) PP PP PP Z T B Belgum ** ** (1980) Denmark -3.20* -7.07** -1.96** -4.09** (1980) Germany ** ** (1974) Greece ** ** (1982) Span ** -6.71** -3.47* (1973) France -4.50** -3.23** -4.32** -4.32** (1970) Ireland ** ** (1982) Ialy ** -4.27** -7.70** (1973) Luxembourg ** ** (1976) Neherlands ** -3.44** -3.45* (1974) usra ** ** (1983) Porugal ** -3.46** -4.66** (1974) Fnland ** ** (1987) Sweden ** ** (1983) UK ** -2.85* -4.33** (1982) Global ** PP whou rend and nercep, excep for Luxembourg (wh rend and nercep). Producvy levels, wh rend and nercep. Producvy growh raes wh nerecep. Crcal values: (a) whou rend or nercep: -1.62, (b) wh nercep: -2.60, (c) wh rend and nercep: -3.19, Crcal values for Z es: For λ=0.1,0.2,0.3,0.4,0.5,0.6,0.7,0.8,0.9, he 5% crcal values are 3.65, -3.80, -3.87, -3.94, -3.96, -3.95, -3.85, -3.82, -3.68, respecvely. The breakpon (T B ) s calculaed mulplyng λ by he number of observaons (T) and s presened n brackes. 18

20 TBLE 3. Parameer esmaes, ΙΝΤ. C -1 C W D80 C *D80 W *D80 R 2 aj. Belgum -0.01** 0.73** ** 0.24** -0.54** (-4.18) (10.59) (3.56) (2.85) (-2.71) Denmark -0.01** 0.68** ** -0.31** (-3.20) (7.55) (2.72) (-2.54) Germany ** 0.69** -0.48** 0.61** -0.01* (4.48) (8.88) (-4.68) (4.60) (-1.72) Greece ** ** (4.76) (-2.37) Span -0.01** 0.65** (-2.33) (5.24) France -0.01** 0.80** ** 0.19** -0.42** (-2.57) (8.78) (2.97) (3.18) (-3.08) Ireland ** -0.15* ** (9.42) (-1.82) (2.41) Ialy ** (8.24) Luxembourg 0.03** 0.62** ** -0.35* (2.08) (5.13) (2.71) (-1.98) Neherlands 0.17* 0.84** -0.38* (1.91) (9.48) (-1.91) usra -5* 0.83** ** (-1.73) (8.73) (2.64) Porugal -0.03** 0.89** ** 0.11* -0.26* (-2.81) (9.13) (3.64) (1.89) (-1.72) Fnland -0.07** 0.68** 0.17** 0.55* (-2.35) (4.75) (2.24) (1.99) Sweden ** ** 0.79 (11.97) UK ** (6.38) ** (3.62) (2.15) C, W, C, C = α 0 1C D 5 D * 6 D * *, **and -- ndcae sgnfcan a 10 and 5% and non-sgnfcan, respecvely. W, 19

21 TBLE 6. Esmaon parameers, INT I -1 C W D80 C *D80 W *D80 R 2 aj. Belgum * * 0.63** 0.12 (1.86) (-1.77) (2.12) Denmark ** ** -0.12** 0.30** (-5.61) (6.72) (-2.67) (2.90) Germany ** (2.67) Greece -0.01* ** (-1.98) (2.30) Span 0.55** ** (4.29) (2.35) France -0.01** 0.53** ** (-2.33) (4.34) (3.15) Ireland -0.03** ** 0.96** ** 0.22 (-3.81) (3.54) (5.20) (-3.79) Ialy -* 0.38** 0.10* (-1.95) (2.63) (1.90) Luxembourg * -1.53** 0.05 (1.69) (-2.05) Neherlands ** 0.03 (1.72) usra * 0.01 (1.74) Porugal ** 0.21** (-2.24) (2.33) Fnland -** 0.36** 0.12** * (-2.22) (2.44) (2.13) (-1.72) Sweden * ** 0.19** 0.63** 0.30 UK -** (-3.67) (1.97) ** (3.78) (-2.97) (2.77) (2.47) C, W, C, I = α 0 1 I D 5 D * 6 D * *, **and -- ndcae sgnfcan a 10 and 5% and non-sgnfcan, respecvely. W, 20

22 FIGURE 1. Curren accoun (S-I), n percenage of GDP Belgum Denmark Germany Greece Span France Ireland Ialy Luxembourg Neherlands usra Porugal Fnland Sweden Uned Kngdom 21

23 FIGURE 2. Toal facor producvy levels ( ), n logs Belgum Denmark Germany Greece Span France Ireland Ialy Luxembourg Neherlands usra Porugal Fnland Sweden Uned Kngdom Global 22

24 FIGURE 3. Counry-specfc producvy levels C Belgum Denmark Germany Greece Span France Ireland Ialy Luxembourg Neherlands usra Porugal Fnland Sweden Uned Kngdom 23

25 FIGURE 4. Counry-specfc producvy growh raes Belgum Denmark Germany Greece Span France Ireland Ialy Luxembourg Neherlands usra Porugal Fnland Sweden Uned Kngdom 24

26 FIGURE 5. Invesmen raes, n percenage of GDP Belgum Denmark Germany Greece Span France Ireland Ialy Luxembourg Neherlands usra Porugal Fnland Sweden Uned Kngdom 25