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Revisiting the Glick–Rogoff Current Account Model: An Application to the Current Accounts of BRICS Countries

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Recent Econometric Techniques for Macroeconomic and Financial Data

Part of the book series: Dynamic Modeling and Econometrics in Economics and Finance ((DMEF,volume 27))

Abstract

Understanding what drives the changes in current accounts is one of the most important macroeconomic issues for developing countries. Excessive surpluses in current accounts can trigger trade wars, and excessive deficits in current accounts can, on the other hand, induce currency crises. The Glick–Rogoff (1995, Journal of Monetary Economics) model, which emphasizes productivity shocks at home and in the world, fit well with developed economies in the 1970s and 1980s. However, the Glick–Rogoff model fits poorly when it is applied to fast-growing BRICS countries for the period including the global financial crisis. We conclude that different mechanisms of current accounts work for developed and developing countries.

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Notes

  1. 1.

    The extended model cannot be applied to Russia for the pre-crisis period due to the lack of data availability.

  2. 2.

    This subsection closely follows the work of Glick and Rogoff (1995), with special focus on productivity shocks on current accounts. For the complete derivations of Eq. (8), please refer to the appendix of their original work. See also Marquesz (2004) and Bussiere et al. (2010) for another extension of the Glick–Rogoff model.

  3. 3.

    Global productivity, \(A_{t}^{W}\), is introduced multiplicatively to the aggregate output in a similar manner as country-specific productivity.

  4. 4.

    \(\alpha_{I}\) and \(\alpha_{K}\) are marginal production of investment and capital as in Eq. (2). \(\beta_{1}\) is the autoregressive coefficient of investment in Eq. (3). The first appearance of \(\beta_{2}\) is omitted in this study, but it is equal to \(\eta [\lambda /(1 - \lambda )] > 0\).

  5. 5.

    Gregory and Head (1999) used dynamic factor analysis to construct a measure of common economic activity for the G7 countries. They find that the common economic activity has substantial impact on productivity but not on current account. İşcan (2000) further disintegrates overall productivity into traded good productivity and nontraded good productivity. He finds that the most influential of all on current account is country-specific traded good productivity.

  6. 6.

    The sample period for Russia only begins in 1995 due to the availability of data.

  7. 7.

    Smit et al. (2014) provided an explanation of the irregular movement of South Africa’s current account deficit as being driven by substantial net capital inflows and their reversals afterward.

  8. 8.

    The definitions and sources of macroeconomic variables are provided in the Appendix A.

  9. 9.

    These conclusions are drawn from comparing the results in Table 2a, b and Table 3a, b. However, the sample periods for the modified model do not exactly match those in the basic model due to the exclusion of a few years for missing macroeconomic variables. The estimation results in appendix Table 4a, b with the sample period adjusted to match those of Table 3a, b confirm that the qualitative results do not change.

  10. 10.

    Attanasio and Weber (2010) question the validity of strong assumption of economic agents being able to solve the intertemporal optimization problem as in the standard macroeconomic models

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Acknowledgements

Yoshida is grateful for financial support from JSPS KAKENHI 19K01673.

Author information

Authors and Affiliations

  1. Faculty of Economics, Shiga University, Shiga, Japan

    Yushi Yoshida & Weiyang Zhai

Authors
  1. Yushi Yoshida
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  2. Weiyang Zhai
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Correspondence to Yushi Yoshida .

Editor information

Editors and Affiliations

  1. Aix-Marseille University, Marseille, France

    Gilles Dufrénot

  2. Osaka Gakuin University, Osaka, Japan

    Takashi Matsuki

Appendices

Appendix A. List of variables

Variable

Source

Description

tfp

PWT9.1

TFP at constant national prices (2011=1)

GDP

WDI

gross domestic product (current LCU)

ca

WDI

current account balance (BoP, current US$) times official exchange rate (LCU per US$, period average)

investment

WDI

gross fixed capital formation (current LCU)

plus changes in inventories (current LCU)

aw1

 

weighted average of G7 countries’ TFP

aw2

 

principal component of G7 countries’ TFP

fdeep

WDI

financial deepening: broad money (% of GDP)

reldepo

WDI

age dependency ratio, old (% of working age population)

reldepy

WDI

age dependency ratio, young (% of working-age population)

nfa

WDI

net foreign assets (current LCU): Net foreign assets are the sum of foreign assets held by monetary authorities and deposit money banks minus their foreign liabilities. Data are in current local currency.

open

WDI

[exports of goods and services (current LCU) + imports of goods and services (current LCU)]/GDP (current LCU)

Appendix B

See Tables 4, 5, and 6.

Table 4 a Basic Glick–Rogoff regression with the TFP residual as country-specific shock and weighted average as global shock; sample adjusted to coincide with Table 3a
Full size table
Table 5 Basic Glick–Rogoff regression for G7 countries with the TFP residual as country-specific shock and the principal component as global shock
Full size table
Table 6 Modified Glick–Rogoff regression for G7 countries with the TFP residual as country-specific shock and the principal component as global shock
Full size table

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Yoshida, Y., Zhai, W. (2021). Revisiting the Glick–Rogoff Current Account Model: An Application to the Current Accounts of BRICS Countries. In: Dufrénot, G., Matsuki, T. (eds) Recent Econometric Techniques for Macroeconomic and Financial Data. Dynamic Modeling and Econometrics in Economics and Finance, vol 27. Springer, Cham. https://doi.org/10.1007/978-3-030-54252-8_10

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