The current account in Peru: a perspective based on the consumption smoothing approach, 1960–1996

This article examines the sustainability of Peru’s current account from the perspective of consumption smoothing, focusing on the period from 1960 to 1996. The study seeks to determine whether the country’s persistent current account deficits—which have exceeded 5 percent of GDP since 1992—constitute an alarming problem. An analytical framework is applied to assess whether the current account acts as a buffer in response to shocks to the national cash flow, defined as output minus investment and government spending. Using an econometric model and an intertemporal approach, it is estimated that Peru has consumed more than is optimal relative to its permanent cash flow. The results indicate that the current account causes changes in national cash flow in the Granger sense, suggesting that the country is biased toward the present in its consumption decisions. This has implications for economic policy, highlighting the need to monitor excessive indebtedness that could compromise stability in the face of external shocks. (Abstract and audio: Department of Economic Publications)