Working Paper No. 04-17
Status and the Current Account in Canada
Rebecca Wilder Brown
This paper investigates the role of wealth in the behavior of the current account. To do so, I include direct preferences for status in a small open economy real business cycle model. Status can take two forms: absolute status or relative status. Absolute status is nonhuman wealth in levels and relative status is the ratio of nonhuman wealth to the aggregate. The absolute status model can match several of the business cycle moments when status plays a large role. Also, total wealth and the current account have a positive relation in the long run. Finally, unanticipated innovations to income and total wealth produce current account surpluses.