“Productivity Shocks, Budget Deficits and
the Current Account”
Bussiere, Fratzscher, Muller
Discussion comments from
John Rogers, FRB
April 29, 2006
Findings
• Productivity shocks are an important
determinant of OECD countries
current account balances.
• Government budget balances are not
important.
• Suggests there is little evidence of a
“twin deficits” story to current
account determination.
Related Literature
• Twin Deficits papers
The Salad Days:
1980s papers (Summers, Bernheim, Roubini, Evans);
Mostly skepticism more recently:
VAR papers;
DGE models (Normandin, Erceg et. al.);
Cross-country estimation (Chinn-Prasad)
• Productivity papers
Glick-Rogoff, Kollman, Nason-Rogers, Gregory-Head
• Bussiere, Fratzscher, Muller
-- Extension of Glick-Rogoff
-- Very well-written, a pleasure to read
Theory Section
• Glick-Rogoff (1995) model with a new wrinkle
• Motivates role for budget balance;
mechanism not taken too seriously
• Add rule-of-thumb consumers to G-R
- -> gov’t budget balance empirically unimportant for CA
- -> Issler-Vahid (JME, 2001)
use same mechanism more successfully
(closed economy VECM as in KPSW)
- -> why no permanent vs. temporary (fiscal policy) distinction?
Ahmed (JME, 1986 and 1987), others
Data
•
Annual, 1960 – 2003
•
Two separate panels
- G-7
- 21 OECD countries
•
Global, country-specific productivity
– OECD measure
– Solow residuals:
(i) Form Solow residual for each country;
(ii) Take (GDP) weighted average across countries;
(iii) Country-specific is deviation from global avergage.
•
Regressions
• Similar to Glick-Rogoff (1995)
(1) ΔCA(t) = rCA(t−1) + λΔS(t) + γ1I(t−1) + γ2ΔAc(t) + γ3ΔAg(t)
(2) ΔI(t) = (β1 − 1) I(t−1) + β2ΔAc(t) + β3ΔAg(t)
-- S primary gov’t surplus (the wrinkle)
-- Ac (Ag) country-specific and global productivity
-- Panel estimates and country-by-country (G-7)
• Of interest:
-- γ2 < 0 γ3 = 0 (standard implications; BFM confirm)
-- λ important? (BFM: No)
Robustness
• Productivity computed with principal component analysis
– Nice, but I’m not sure this identifies common world productivity
 Provide details
 Relate to Gregory and Head (JME, 1999) [more below]
• Drop certain countries from the sample
• Cyclically adjusted fiscal balance vs. unadjusted
Why Aggregate the Data?
•
Best answer may be comparability with GR.
•
But using average productivity  e.g., a large movement in any individual country
raises the average even if all other countries productivity unchanged.
Suppose there is a country specific component to TFP.
- If it is idiosyncratic white noise, aggregating will wash it out.
- If ~ random walk and independent across the economies, aggregating fine.
- If ~ ARMA(p,q) and correlated across economies, aggregating implies
mismeasurement of aggregate TFP. (Literature on “common features”.)
Alternative: Common trend-common cycle model
- Vahid and Engle (JAE, 1993), Engle and Issler (JME, 1995).
- Test for number of permanent and transitory components in G-7 TFPs.
- Use estimates to test response of G-7 CA and I to TFP shocks.
- Method measures simultaneous productivity changes in all seven countries.
- Fluctuations may be of any magnitude and still be entirely country-specific.
- Common movements fundamentally different from cross-country averages.
Conjecture: common features exist in G-7 transitory country specific TFPs because G-7
output growth rates appear to share common features.
Suggested Alternative Approach
• Follow Gregory and Head (JME, 1999)
- Dynamic factor model of Productivity, Investment and CA
Zjt = aZjWt + uZjt,
Ijt = aIjWt + bjuZjt+ uIjt
CAjt = aCAjWt + cZjuZjt + cIjuIjt + uCAjt
• Current account decomposed into four components:
– world-wide component, W;
– country-specific productivity (uZ) and investment (uI) fluctuations;
– residual associated with fluctuations in neither productivity nor investment.
• Results:
– Country-specific productivity fluctuations little impact on CA
(consistent with GR)
– Country-specific investment fluctuations of primary importance for CA
Other Alternatives
• Chinn-Prasad (JIE, 2003)
– Empirical determinants of “medium-horizon” CA
fluctuations
– More satisfying econometrically than GR regressions
– Gov’t budget balance consistently positive and
significant
• Nason-Rogers (JMCB, 2002)
– Emphasis on joint dynamics of Investment and CA
– Use a collection of restrictions and several justidentified VARs of I and CA
– Focus on shocks
Conclusion
• BFM find no evidence for Twin Deficits
story for CA determination.
• Suggestions:
– (1) examine time-variation in estimates
– (2) relate more to existing literature