The Present Value Model and New Zealand’s current account

Release date
01/12/2006
Reference
DP2006/12
Authors
Anella Munro; Rishab Sethi
This paper tests the present value model of the current account on New Zealand data. There is some evidence in favour of the PVM – the current account tests as stationary and Granger-causes changes in national net income. However, the cross-equation restrictions implied by the model are rejected both individually and jointly. This result holds for both the linear and non-linear versions of the tests. The orthogonality test results are consistent with rejection due to the presence of a transitory demand shock. We conclude that a richer model is needed to understand current account dynamics.