Intertemporal Dynamics: Convergence Speed of Current Account across Countries

Empirical data shows that current account has the property of mean-reversion and the speed of current account convergence is heterogenous across countries. In order to explore the factors which affect the current account adjustment speed of a small country, this paper builds up a model to study how current account would be affected by factors such as labor supply and monetary policies. We found that labor market rigidity may have a significant effect, but monetary policies only have a small impact on current account adjustment.