A Test of Intertemporal Model of Current Account: Evidence from the Czech Republic, Hungary, Poland and Slovakia

A current account may be viewed as an indicator of an imbalance between savings and investments in an economy. One of the key issues is the degree to which consumption is sensitive to actual temporary changes in current income. Modern intertemporal approach builds on permanent income hypothesis, which concludes that the sensitivity of consumption (and savings) to temporary changes in income is low. The paper formulates a simple intertemporal model of current account and employs the present value test of the model in the cases of the Czech Republic, Hungary, Poland and Slovakia. It further focuses on the role of habits in modeling current accounts. The results show that a simple intertemporal model has some descriptive power, especially in the case of the Czech Republic, but overall it gives rather poor results. It is the assumption that the economy consists strictly of ricardian agents that seems to be the main reason behind the empirical failure.