Are Australia's Current Account Deficits Excessive?

International Capital Flows and National Creditworthiness: Do the Fundamental Things Apply as Time Goes by?

“…Importantly, the preference for current consumption over future consumption (consumption-tilting) has become less pronounced in the later subperiod (1991:1-1998:2, with 8= 0.937) in comparison with the early subperiod (1984: 1-1990:4, 8= 0.912). In earlier work using annual data, Cashin and McDermott (1998) found that the preference for current consumption over future consumption became more pronounced in the period 1975-94 (8 = 0.932), in comparison with 1954-74 (8 = 0.987). The 1975-94 period includes Australia's move to a floating exchange rate in late 1983, and the simultaneous removal of remaining capital controls and relaxation of restrictions on financial markets.…”

“…Our results here yield a value for the rate of time preference of 0.0437 for the period 1984: 1-1990: 4, and 0.0426 for the period 1991: 1-1998: 2; that is, 37 and 26 basis points over the world real interest rate, respectively. These estimates compare with those of Cashin and McDermott (1998), which were 5 and 27 basis points over the world real interest rate for the periods 1954-74 and1975-94, respectively;and of Milbourne and Otto (1992) of 49 basis points over the world real interest rate for the period 1983 :4-1989: 1. In contrast, Kent (1997) finds the rate of time preference between 1949-95 to be only marginally (0.7 basis points) above the world real interest rate-however, for most of his sample period, Australia was constrained from borrowing on international capital markets, and so was forced to favor future consumption relative to present consumption.…”

“…20 In Cashin and McDermott (1998), data from the period 1954-74 clearly resulted in the rejection of the consumption-smoothing model of the current account, as it should have given the presence of capital controls. As for the period 1975-94, both C t and (Zt -rb t ) were marginally cointegrated, given that this twenty-year period mixed: a subperiod during which the consumption-smoothing model of the current account was inappropriate because of the presence of capital and exchange controls (1975-83); a subperiod during which economic distortions were prominent and distorted consumption choices (1975-90); and a subperiod during which the consumption-smoothing model was a valid representation of Australia's current account, due to the relative absence of capital controls and distortions (1991 onwards).…”

“…3 The innovations of this paper comprise the use of a test for cointegration which allows for the presence of a structural break of unknown timing, and the construction of bootstrapbased confidence bands to provide a confidence interval with which to gauge the statistical 2 Theoretical advances in this area of open economy macroeconomics were provided by Sachs (1982) and Svensson and Razin (1983). Empirical evaluation of these types of present value models of international capital flows has been undertaken by, among others, Agenor et al (1999), Cashin and McDermott (1998), Kent (1997), Ghosh (1995), Milbourne andOtto (1992), andOtto (1992), based on the methodology developed by Campbell (1987) and Campbell and Shiller (1987).…”

Challenging the Empirical Evidence From Present Value Models of the Current Account

“…Also, the data does not support claims that the current account is excessively volatile. In our samples, the probability that the predicted series is 19 Cashin and McDermott (1998a) and Hall et al (2001) generate confidence bands using bootstrapping techniques. However, Sims and Zha (1995) show that Bayesian bands are often better even by classical criteria.…”