Abstract
In this paper, a simple intertemporal current account model is developed for a small open economy with imperfect capital markets. The model nests both perfect and imperfect international capital mobilities as its special cases. The model is empirically examined using Taiwan's annual data for the period between 1961 and 1990. Our results show that the model is able to explain some historical movements of Taiwan's trade balance. However, in contrast to many findings from previous studies for other countries, the model is rejected. One important feature of the rejection of the model is that the actual trade balance series is much more volatile than can be explained by the model, this is especially so for the periods when world oil shocks occurred. These results indicate that changes in the terms of trade, which our simple model neglects, might be important factors in Taiwan's current account determination. c 1993, Taylor & Francis Group, LLC. All rights reserved.