Glenn Otto

Testing a present-value model of the current account: Evidence from US and Canadian time series

Abstract This paper presents a simple model of current account determination, based upon the permanent-income hypothesis of private consumption behavior, under rational expectations. The model employs a representative national agent, who is forward-looking and can borrow and lend at a constant world interest rate. A present-value relationship for the current account is derived and its implications are tested on post-war data for the United States and Canada. Testing is done using the framework developed by Campbell and Shiller (1987), which allows the forcing variables in the model to be difference rather than trend stationary. Our empirical results indicate the most stringent restrictions of the present-value model are strongly rejected by the US and Canadian data. However less formal procedures suggest the consumption smoothing model has some ability to track the dynamic behavior of the US current account. (JEL F32)

Public investment and economic growth

This article uses an extension of Mankiw, Romer and Weils augmented Solow-Swan growth model to examine whether public investment has a distinct role as a determinant of economic growth. It considers both the predictions of the model in steady state and in transition to steady state. For the steady state model, there is no significant effect from public investment on the level of output per worker. Using standard ordinary least squares (OLS) methods for the transition model, it observes a significant contribution to economic growth from public investment. When instrumental variables methods are used, however, the associated standard errors are much larger and the contribution of public investment is statistically insignificant.

Terms of trade shocks and the balance of trade: there is a Harberger-Laursen-Metzler effect

Abstract According to the Harberger-Laursen-Metzler (HLM) effect an exogenous increase in the terms of trade faced by a small open economy leads to an improvement in that country’s trade balance. In this paper structural vector autoregression techniques are used to investigate whether there is any systematic pattern in the responses of the trade balance to terms of trade shocks for a large number of small open economies. Two important results emerge. First there is strong support in the data for the existence of an HLM effect. Second the response of the trade balance and real income to a terms of trade shock implied by the structural vector autoregression model are strongly consistent with those reported by Mendoza (1995) from simulating a particular dynamic stochastic equilibrium model of a small open economy.

The Growth of House Prices in Australian Capital Cities: What Do Economic Fundamentals Explain?

This paper examines the ability of standard economic factors to explain the growth of real house prices in Australias capital cities. Dynamic models are estimated for each city with the objective of identifying the major drivers of house price growth rates. The variable mortgage rate is found to be an important influence on growth rates in all eight capital cities. However, the size of the mortgage rate effect can differ substantially between cities. For example a 25 basis point rise in the mortgage rate reduces the long-run quarterly growth rate of real house prices by about 1 per cent in Sydney compared with only 0.4 per cent in Adelaide. The effects of other economic variables are less systematic, significantly affecting the growth rate of capital gains in some cities but not in others. Nevertheless, for most Australian cities economic factors are found to explain around 40 to 60 per cent of the variation in the growth rate of house prices.

Inflation and the Capital Stock

There is a long literature examining the theoretical relationship between the rate of inflation and the size of the capital stock in an economy. This literature has produced varied predictions about the effects of inflation on the capital stock. In this paper we present some time series evidence on this issue. We estimate a structural VAR model for thirty-four countries and discover that for the majority of these countries there is no statistically significant long run effect of inflation on the capital stock. Moreover, for countries where a significant effect is found, the long run coefficient estimate is typically positive. Overall, our empirical results support the view that the long run level of the capital stock is invariant to permanent changes in the inflation rate.

Is Public capital Provision Efficient

In this paper we provide a test of whether an optimal level of public investment has been undertaken in Australia over the last three decades The test is based on the intertemporal efficiency conditions for the standard optimal growth model with both private and public capital.

Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market

We examine whether asset pricing theory can explain residential property prices. Using quarterly data for Local Government Areas in Sydney from 1991 to 2006, we find little evidence that variations in price : rent ratios anticipate future real rent growth. Instead changes in price : rent ratios apparently reflect changing expectations about future discount factors. Some important geographical differences in the behaviour of property prices across metropolitan Sydney are identified. A significant proportion of the variation in property prices in outer western regions of Sydney is not explained by either rents or discount factors; pointing to a possible role for a speculative bubble. Copyright

Can an Intertemporal Model Explain Australia's Current Account Deficit?

No abstract available.

Consumption, external assets and the real interest rate☆

Abstract An intertemporal model is used to explain the long-run behavior of external assets. The model predicts that consumption, income and net external assets are cointegrated; a maximum likelihood procedure is used to test this hypothesis and to test linear restrictions implied by the model. Seven countries are considered with variable results. The model performs well for the United States and Germany, but yields improbable estimates of the real interest rate for the smaller economies considered. Adjustments for currency valuation effects improve the results for some of the small economies.

Seasonal Unit-Root Tests on Canadian Macroeconomic Time Series

In this note we subject some Canadian macroeconomic time series to test of seasonal and non-seasonal unit roots. Overall we find evidence that the series are integrated at some of the seasonal frequencies as well as at a zero frequency.