Investment and the Current Account: A Triangular Model of the G-7 Key words: Investment; current account; triangular simultaneous equations model; random coefficients regression model

The joint behavior of investment and the current account is derived as a triangular simultaneous equations model. To estimate this model for the G7 countries, we propose a full-information GLS estimator for panel data that extends Zellner-Theil three-stage least squares estimator and allows for parameter heterogeneity across individual countries. We find that the null of parameter homogeneity is rejected, that global productivity shocks common to the G7 significant impact on individual country investment movements, and that their influence on investment exceeds that of country-specific productivity shocks. The common productivity shocks are also found to have significant effect on the current account, but the response is asymmetric across countries.