Long Run Current Account through theoretical Intertemporal Model

This paper analyses the current account in the present value model (PVMCA) framework. Based on Obstfeld and Rogoff’s book (1996), we aim to model the current account (CA) to GDP ratio in the long run. Since there is scarce theory-based empirical modeling, this paper provides evidence for main determinants of the current account. Firstly, we criticize the tautological approach in the paper of Cerrato et al. (2014) when they use a simple relation between the output growth and the per capita GDP growth. This relation leads to identical equations of aggregate and per capita CA-to-GDP ratio. Secondly, we consider the overlapping generations to determine the equation of per-capita CA using relevant variables. This model appears more interesting and testable. It allows to verify empirically the validity of the PVMCA through the quasi-elasticity of CA-to-GDP with respect to the per capita growth rate of output and consumption.