Working Paper No. 04-11

The Current Account and the Interest Differential In Canada
Martin Boileau and Michel Normandin
October 2004


For post-1975 Canadian data, we document the joint behavior of output, the current account, and the interest differential at the business cycle frequecy. We also interpret the joint behavior using a simple small open economy model. Our simple model assumes that agents have access to world international financial markets, but face country-specific interest rate on their holdings of world assets. The interest differential depends negatively on the country's net foreign asset position. We find that our simple model matches the Canadian data remarkably well.

JEL classification: E32; F41; G15
Keywords: International Real Business Cycle, Small Open Economy, Habit Formation