The Relative Dynamics of Investment and the Current Account in the G7-Economies

and Mark Taylor for many comments and discussions. I would also like to thank seminar participants at the Conference ’The Monetary Transmission Mechanism ’ in Trondheim, the Econometrics Summer Workshop at Humboldt University and at the University of Manchester. This paper contributes to the empirics of the intertemporal approach to the current account. We use a cointegrated VAR framework to iden-tify permanent and transitory components of country-speci…c and global shocks. Our approach allows us to empirically investigate the sensitivity to persistence implied by many forward-looking models and our results shed new light on the excess volatility of investment encountered by Glick and Rogo ¤ (JME 1995). In G7 data, we …nd the relative current-account and investment response to be in line with the intertemporal approach. JEL classi…cation: F41, F4