Abstract

This paper contributes to the empirics of the intertemporal approach to the current account. We use a cointegrated VAR framework to identify permanent and transitory components of country‐specific and global shocks. Our approach allows us to investigate empirically the sensitivity to persistence implied by many forward‐looking models and our results shed new light on the excess volatility of investment encountered by Glick and Rogoff (1995). In G7 data, we find the relative current‐account and investment response to be in line with the intertemporal approach.

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