Solow residuals are used as proxies for productivity shocks in many empirical studies.Considering the shortcomings of this approach this paper proposes the common trends approach as an alternative.The common trends econometric technique is utilized here in an attempt to identify and analyze the long run effects of country-specific and global productivity shocks on fluctuations in investment and the current account.The theoretical framework utilized provides long run restrictions relevant for identifying global and country-specific productivity shocks.Our estimations yield the following stylized facts.Generally, consistent with theoretical predictions, the long run effects of positive idiosyncratic (country-specific) productivity shocks on the current account are significantly negative.Further, permanent global shocks are impotent (by theoretical restriction) in explaining fluctuations in the current account though very significant in explaining investment fluctuations.
|Place of Publication||Tilburg|
|Number of pages||34|
|Publication status||Published - 1996|
|Name||CentER Discussion Paper|
- current account
- stochastic processes
- capital movements