We document the role of capital gains and losses for the current account that a country can sustain along a balanced growth path. While it is well know that growth allows a country to run a current account deficit and still keep its external debt stable as a share of GDP, the sensitivity of the current account to the composition of external assets and liabilities has received little attention. We show that this composition matters because several assets, such as equity or FDI, earn substantial capital gains that are not reflected in the current account. A country that is a net creditor in such assets can then sustain a larger current account deficit. Using a broad sample, we show that this aspect substantially tilts estimates of the long-run current account towards a deficit among industrialized economies, with the opposite situation for emerging markets. We also show that industrialized economies are likely to benefit from predictable capital gains in the future. Copyright 2008 The Author Journal compilation 2008 Banca Monte dei Paschi di Siena SpA.
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Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.
Volume (Year): 37 (2008) Issue (Month): 3 (November) Pages: 283-313 Download reference. The following formats are available: HTML
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