Consumption Smoothing and the Current Account: Evidence for France, 1970-1994

IMF Working Papers, November 1, 1995

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Consumption Smoothing and the Current Account: Evidence for France, 1970-1994

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Bibliographic details

• Authors: Claude Bismut, Paul Cashin, C. John McDermott, Pierre-Richard Agénor
• Published: November 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451940237.001

Summary

• The paper estimates a simple consumption-smoothing model of the French current account for the period 1970-1994.
• The model treats the current account as a buffer enabling private agents to smooth consumption over time in response to temporary disturbances to output, investment, and government expenditure.
• Empirical results indicate the model performs well overall and "predicts correctly the sharp turnaround in France’s external accounts observed in the past three years" — a feature conventional trade-flow models based on income and relative price variables appear unable to explain.

Model and methodology

• Conceptual approach: current account as a consumption-smoothing buffer.
• Disturbances considered: temporary shocks to output, investment, and government expenditure.
• Time span analyzed: 1970-1994.

Main findings

• The consumption-smoothing model provides a good overall fit to French external sector developments over 1970-1994.
• The model successfully accounts for a "sharp turnaround in France’s external accounts observed in the past three years", which conventional income-and-relative-price-based trade-flow models do not explain.
• The paper highlights the importance of transient shocks and private-agent behavior in driving current account dynamics.

Key implications for policy and analysis

• Models that incorporate consumption-smoothing behavior and treat the current account as a buffer can improve understanding and prediction of external account movements.
• Reliance solely on conventional trade-flow models (income and relative price variables) may miss important dynamics associated with temporary shocks and consumption-smoothing.
• Analysis of external performance should account explicitly for shocks to output, investment, and government expenditure and their effects on private consumption decisions.

Source: Claude Bismut, Paul Cashin, C. John McDermott, and Pierre-Richard Agénor, "Consumption Smoothing and the Current Account: Evidence for France, 1970-1994", IMF Working Papers 1995, 119 (1995), November 1, 1995.