∆zt
∆zt-p
(12)
cat
cat-p
The coefficients of Γ∆z and Γca (which are both 1 x p vectors) are computed using the VAR
estimates as well as the world rate of interest according to the methodology described in equation
(11). The implication of the model for a higher order VAR as noted in Ghosh (1995) is that the
coefficients of national cash flow are zero, the coefficient of the contemporaneous current
account is unity and the coefficients of the lagged current account are zero. Therefore, equation
(12) can be rewritten as
∆zt
cα*=[0 L 0 10 l0]
∆zt-p
cat
(13)
ca
t-p
Equality of the actual and optimal consumption smoothing current account can also be
visually depicted by graphing the two series. Both the visual and statistical tests of equality of the
two accounts are discussed in the next section.
The third implication of the model is the equality of the variance of the actual and the optimal
consumption smoothing current account. This can be tested with an F-test of equality of variance
between the two series. Results of this test will be presented and discussed in the following
section.
All these implications rest on the estimation of the VAR for the change in national cash flow,
∆(qt - it - gt ) and the actual consumption smoothing current account, cat = yt - it - gt -θct .
The compute the latter, we require the consumption tilting parameter, θ. From the equation of the
11
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