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Saving, Investment and Current Account Dynamics *
Author(s) -
BURBDDGE JOHN B.,
SCARTH WILLIAM M.,
STEMP PETER J.
Publication year - 1994
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1994.tb01858.x
Subject(s) - current account , economics , investment (military) , capital (architecture) , current (fluid) , government (linguistics) , path (computing) , macroeconomics , small open economy , monetary economics , monetary policy , computer science , physics , history , linguistics , philosophy , archaeology , politics , exchange rate , political science , law , programming language , thermodynamics
A standard model of a small open economy involving optimizing households and firms is used to derive the dynamics of private saving and investment. The paper is critical of a common test of perfect capital mobility, since domestic saving and investment can easily correlate positively despite the assumption of perfect capital mobility. The time path for the current account deficit is studied both analytically and through simulations. Adjustment is very slow, and overshooting in the current account is possible. Even though the government budget is balanced the current account deficit can remain large for many years before being eliminated.