The open economy excess sensitivity hypothesis: Theory and Swedish evidenceJohan Adler
No 88, Working Papers in Economics from University of Gothenburg, Department of Economics Abstract: This paper extends the theory of open economy consumption behavior by applying Flavin's (1993) excess sensitivity hypothesis (ESH) to the current account. The ESH can be interpreted as a generalization of the open economy permanent income hypothesis (PIH) that allows for any degree of international capital mobility. As such, the ESH can account for why the PIH fails and for the related puzzle of an excessively volatile current account. Furthermore, the ESH suggests an alternative approach for assessing a country's degree of international capital mobility. Using annual Swedish data for the period 1951-99, the empirical evidence implies that, in contrast to the PIH, the ESH cannot be rejected.
Keywords: Excess sensitivity; Permanent income; Consumption; Current account; Capital mobility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hhs:gunwpe:0088 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Working Papers in Economics from University of Gothenburg, Department of Economics Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden. Contact information at EDIRC. |
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