Theoretical models of the relationship between investment and the current account impose restrictions on the joint dynamic behavior of these variables. These restrictions come in two forms. One imposes causal orderings on investment and the current account. The other restriction concerns the...

Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the "usual suspects" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these...