australia current account
less than
unity, implying that Australia is consuming more than its permanent cash flow and must be running down its stock of foreign assets or increasing its foreign
liabilities. The preference for current consumption over future consumption has become more pronounced in the later part of the sample (1975-94), which
includes Australia's move to a floating exchange rate in late 1983, and the simultaneous removal of remaining capital controls and relaxation of restrictions on
financial markets.
The results of Phillips-Ouliaris (1990) Z(t) residual-based unit root tests for cointegration, and three Hansen (1992) tests of parameter stability (mean-F, sup-F,
and Lc), are also shown in Table 2.21 The parameter tests all indicate a stable relationship between national cash flow and consumption at the 5 per cent
significance level. Cointegration is accepted at the 5 per cent significance level in the full sample and in both subsamples.
However, a note of caution is warranted here. The parameter stability tests are prone to low power problems due to the fact that potential change points are
unknown. Assuming that we know that there was a change point in 1974 we can formally test whether the tilting parameter is different in the two subperiods
1954-74 and 1975-94 by using a Chow test, which has an F distribution when based on a suitably corrected standard variance estimator. The computed value of
this test statistic was 40.5, which implies that the hypothesis of a common tilting parameter in both periods is rejected at the 1 per cent level. The estimated value
of theta is lower in the latter subsample, indicating a strong secular tendency towards current account deficits in this period.
(ii) Hypothesis Tests
The standard F-test for the absence of `Grangercausality' from the current account to national cash flow is rejected at the 5 per cent significance level for the full
sample, implying that the current account `Granger-causes' changes in national cash flow (Table 3). The nonlinear restriction on the VAR parameters of equation
(7), examining whether the model implies a close association between movements in the actual and optimal current account measures, is not rejected at the 5 per
cent level of significance in the full sample and the later subsample, but was rejected in the early subsample. The rejection in the early part of the sample indicates
the model is more suitable for Australia in the later period, which includes the period when restrictions on capital flows had been reduced. In the early part of the
sample capital controls were in place, restricting the use of international borrowing and lending to smooth consumption over time. As predicted by the model,
CA^sub t^- (Delta)z ^sub t ^ - (l+r)CA^ sub t^-^sub I^ is largely uncorrelated with lagged changes in national cash flow and lagged current accounts (Table
3).22
The most telling result that indicates the improved performance of the [next page]