THE CURRENT ACCOUNT IN DEVELOPING-COUNTRIES - A PERSPECTIVE FROM THE CONSUMPTION-SMOOTHING APPROACH

According to the consumption-smoothing view, a high degree of capital mobility implies that agents are able to fully smooth their consumption in the face of shocks. This article develops a framework to test whether, indeed, the current account in developing countries acts as a buffer to smooth consumption in the face of shocks to national cash flow, which is defined as output less investment less government expenditure. Using vector autoregression analysis, we estimate the optimal consumption-smoothing current account with data from a sample of forty-five developing countries. We find that for a majority of the countries, the hypothesis of full consumption smoothing cannot be rejected, suggesting that capital mobility may after all be quite high in this group of countries.