Back to top anchor
Working paper

New Zealand's Current Account Deficit: Analysis Based on the Intertemporal Optimisation Approach (WP 01/02)

Issue date: 
Saturday, 1 December 2001
Status: 
Current
View point: 
Document Date: 
Publication category: 
JEL classification: 
E21 - Macroeconomics: Consumption; Saving; Wealth
F32 - Current Account Adjustment; Short-term Capital Movements

Abstract

 

New Zealand's Current Account of the Balance of Payments has been persistently in deficit since the early 1970s and increased markedly during the late 1990s. Is this a cause for significant concern? This paper tackles this question by evaluating New Zealand's external solvency, the degree of optimality of the intertemporal consumption smoothing through its current account, and whether its international financial capital flows have been used in an optimal (consumption-smoothing) fashion. We carry out statistical tests in relation to external solvency. We also estimate a "benchmark" consumption-smoothing component for its current account based on an intertemporal optimisation model in order to carry out tests of the optimality of the size and volatility of the current account. We could not reject the hypotheses that New Zealand's current account was consistent with optimal smoothing, that the external solvency condition has been satisfied, and that there is "no excess volatility" in international financial capital flows.

Last updated: 
Wednesday, 24 October 2007