Research

February 28, 2015 at 12:15 pm

Duncan Studies ‘A Threshold Model of the U.S. Current Account’

Dr. Roberto Duncan, Professor of Economics at Ohio University, published a working paper on “A Threshold Model of the US Current Account” in October 2014.

Dr. Roberto Duncan

Dr. Roberto Duncan

The study was for the Federal Reserve Bank of Dallas’ Globalization and Monetary Policy Institute

Abstract: What drives U.S. current account imbalances? Is there solid evidence that the behavior of the current account is different during deficits and surpluses or that the size of the imbalance matters? Is there a threshold relationship between the U.S. current account and its main drivers? We estimate a threshold model to answer these questions using the instrumental variable estimation proposed by Caner and Hansen (2004). Rather than concluding that the size or the sign of (previous) external imbalances matters, we find that time is the most important threshold variable. One regime exists before and another one exists after the third quarter of 1997, a period that coincides with the onset of the Asian financial crisis and the Taxpayer Relief Act of 1997. Statistically significant determinants in the second regime are the fiscal surplus, productivity, productivity volatility, oil prices, the real exchange rate, and the real interest rate. Productivity has become a more important driver since 1997.

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