Semester

Fall

Date of Graduation

2008

Document Type

Dissertation

Degree Type

PhD

College

Chambers College of Business and Economics

Department

Economics

Committee Chair

Arabinda Basistha

Abstract

Current account imbalances are always a concern for macro policymakers as they can lead to balance of payments crises. However, both governmental policy interventions and external economic fundamentals may affect the current account. This thesis empirically examines the effects of the policy interventions and shocks to external economic fundamentals on the current account.;In Chapter 1, I study the effect of the fiscal deficit on the current account in Peru. I test whether the twin deficit hypothesis holds after the stabilization program and structural reforms of 1991 took place. Even though the new regime was much more financially open, this hypothesis does not hold. Estimates imply that these policy reforms were not enough to generate a response of current account to fiscal shocks.;In Chapter 2, I reexamine the empirical hypothesis that states that the inflation targeting regime does not affect current account. Inflation targeting leads to a fall in real interest rate and lowers macroeconomic uncertainty by reducing exchange rate volatility and output volatility. Economic theory implies that all of these changes should worsen current account. The new estimates show that, consistent with economic theory, inflation targeting does affect current account negatively once global shocks are properly accounted for.;In Chapter 3, I examine the effects of permanent terms of trade shocks in Norway on current account and productivity. Using structural VAR analysis with long-run restrictions, the empirical results show an improvement in the current account of Norway following a permanent shock to terms of trade. However, the permanent shock to terms of trade has very little effect on output per capita growth. Overall, the evidence suggests that shocks that have permanent effects on terms of trade or output per capita do not have permanent effects on each other.;Chapter 4 concludes.

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