Tests of the Present-Value Model of the Current Account : A Monte Carlo Study

Using a Monte Carlo approach, we evaluate the small-sample properties of four different tests of the present-value model (PVM) of the current account: the non-linear Wald, linear Wald, Lagrange multiplier, and likelihood ratio tests. We find that the non-linear Wald test is biased towards over-rejecting the cross-equation restrictions implied by the PVM, and that the test statistic is uncorrelated with the goodness of fit of the PVM. The three alternative tests are essentially equivalent and are more reliable in evaluating the PVM