Semi-parametric predictions of the intertemporal approach to the current account

This paper uses the method dynamic programming (DP) by GMM and Canadian data to estimate a dynamic model of a small-open economy. DP by GMM has several appealing features: it does not impose certainty equivalence, it accommodates multiple shocks and imposes few restrictions on the properties of the shocks in the model. Also, since it uses the actual shocks series to estimate approximate decision rules, it produces sample paths for the endogenous variables in the model. The model estimated fits the data well. In particular, the variance of the predicted trade balance-output ratio matches its empirical counterpart.