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 withã€€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
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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(19802013)

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
