This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

The Role of Stock Markets in Current Account Dynamics: a Time Series Approach

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Benoit Mercereau (International Monetary Fund (the views expressed in this paper are those of the author and do not necessarily represent those of the International Monetary Fund))

Additional information is available for the following registered author(s):

Abstract

This paper develops a simple model to study the impact of stock markets on the current account. The model allows for an arbitrary number of risky assets, which form an incomplete market, as well as a risk-free bond. A closed-form solution for the current account is derived from the optimal portfolio and consumption/saving choices of a representative agent. Formally, the model can be seen as a stock-market-augmented version of the "fundamental equation of the current account" popularized by Sachs. In order to make the main points of the model clear, I first solve it taking prices as given. A general equilibrium is analyzed in a companion paper.I suggest that the model sheds light on the recent US current account deficit. Some claim that this current account deficit reflects over-optimistic -"irrationally exuberant"- expectations of future stock market performance. The model, however, suggests that it is optimal for a country to run a current account deficit even if people do not expect the stock market boom to last. Another insight afforded by the model is that the current account may help predict future stock market performance and/or future endowments streams. This forecasting property can be formally expressed by a set of Granger causality and Granger causal priority propositions.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1063&context=bejm
File Format: application/pdf
File Function:
Download Restriction: Subscription to the journal may be required to access full texts.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 3 (2003)
Issue (Month): 1 ()
Pages: 1063-1063
Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Handle: RePEc:bep:mactop:v:3:y:2003:i:1:p:1063-1063

Note: oai:bepress:bejm-1063
Contact details of provider:
Web page: http://www.bepress.com/bejm/topics/

Order Information:
Web: http://www.bepress.com/subscriptions.html

For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).

Related research
Keywords: current account stock market

Other versions of this item:

Find related papers by JEL classification:
F3 - International Economics - - International Finance

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Aart Kraay & Jaume Ventura, 2000. "Current Accounts In Debtor And Creditor Countries," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1137-1166, November. [Downloadable!] (restricted)
    Other versions:
  2. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November. [Downloadable!] (restricted)
    Other versions:
  3. Steven J. Davis & Jeremy Nalewaik & Paul Willen, 2000. "On the Gains to International Trade in Risky Financial Assets," NBER Working Papers 7796, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November. [Downloadable!] (restricted)
    Other versions:
  5. Olumuyiwa Adedeji, 2001. "The Size and Sustainability of the Nigerian Current Account Deficits," IMF Working Papers 01/87, International Monetary Fund. [Downloadable!]
  6. Jaume Ventura, 2001. "A Portfolio View of the U.S. Current Account Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 241-258. [Downloadable!]
  7. David A. Marshall & Nayan G. Parekh, 1999. "Can Costs of Consumption Adjustment Explain Asset Pricing Puzzles?," Journal of Finance, American Finance Association, vol. 54(2), pages 623-654, 04. [Downloadable!] (restricted)
  8. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January. [Downloadable!] (restricted)
  9. Tim Callen & Paul Cashin, 1999. "Assessing External Sustainability in India," IMF Working Papers 99/181, International Monetary Fund.
  10. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 29-51. [Downloadable!]
    Other versions:
  11. Jonathan David Ostry, 1997. "Current Account Imbalances in ASEAN Countries - Are they a Problem?," IMF Working Papers 97/51, International Monetary Fund.
  12. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Blackwell Publishing, vol. 84(2), pages 147-59.
  13. Cashin, Paul & McDermott, C John, 1998. "Are Australia's Current Account Deficits Excessive?," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 346-61, December.
    Other versions:
  14. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  15. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February. [Downloadable!] (restricted)
    Other versions:
  16. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(3), pages 357-86. [Downloadable!] (restricted)
  17. Agenor, Pierre-Richard & Bismut, Claude & Cashin, Paul & McDermott, C. John, 1999. "Consumption smoothing and the current account: evidence for France, 1970-1996," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 1-12, January. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Benoît Mercereau, 2003. "Stock Markets and Real Exchange Rate: An Intertemporal Approach," IMF Working Papers 03/109, International Monetary Fund. [Downloadable!]
Statistics
Access and download statistics

Did you know? The most prolific authors have over 400 items listed on IDEAS.

This page was last updated on 2008-11-13.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.