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 consumptio n in the face of shocks. This article develops a framework to test whe ther, indeed, the current account in developing countries acts as a bu ffer to smooth consumption in the face of shocks to national cash flow , which is defined as output less investment less government expenditu re. Using vector autoregression analysis, we estimate the optimal cons umption-smoothing current account with data from a sample of forty-fiv e developing countries. We find that for a majority of the countries, the hypothesis of full consumption smoothing cannot be rejected, sugge sting that capital mobility may after all be quite high in this group of countries.