| This dissertation contains two essays which study issues concerning the dynamics of the current account. The first essay titled, "The Terms of Trade and Present Value Tests of Intertemporal Current Account Models", develops a present value model of the current account which includes a variable terms of trade, in addition to the real exchange rate, real interest rate, and net output, and tests empirically whether or not the model is able to better explain current account movements compared to previous present value models in the literature. Based on quarterly data from four OECD countries, the empirical results indicate that incorporating the terms of trade does not increase the empirical fit of the present value model of the current account. These results suggest that substitution effects arising from terms of trade shocks may not play as significant a role in explaining current account imbalances as previously thought.;The second essay titled, "The Real Effects of Learning in Exchange Rate-Based Stabilizations of Uncertain Duration", reevaluates the capability of the uncertain duration of policy framework to replicate the consumption and current account dynamics associated with exchange rate-based stabilization (ERBS) programs. An open economy monetary model is developed which allows private agents' expectations about the duration of stabilization policy to vary over time according to a Bayesian learning scheme. The two main findings of the model are the following. First, the model implies that the real effects of ERBS programs may be driven by the perceived success of the program rather than its impending failure as implied by earlier models. Second, the effects of learning about the duration of stabilization policy enable the model under certain circumstances to reproduce the stylized facts regarding consumption in ERBS programs, but not the current account. |
