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Towards a Theory of Current Accounts

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  • Jaume Ventura

    (CREI-UPF and MIT)

Abstract

The current accounts data of industrial countries exhibits some strong patterns that are inconsistent with the intertemporal approach to the current account. This is the basic model that international economists have been using for more than two decades to think about current account issues. This paper shows that it is possible to go a long way towards reconciling the theory and the data by introducing two additional features to the basic model: investment risk and adjustment costs to investment. Moreover, these extensions generate new and unexpected theoretical predictions that receive substantial support in the data. The overall message is therefore positive: with a couple of reasonable modifications, the intertemporal approach to the current account provides a fairly good description of the industrial country data. Copyright � Blackwell Publishing Ltd 2003.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 26 (2003)
Issue (Month): 4 (04)
Pages: 483-512

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Handle: RePEc:bla:worlde:v:26:y:2003:i:4:p:483-512

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References

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  1. Aart Kraay & Norman Loayza & Luis Servén, 2001. "Country portfolios," Working Papers Central Bank of Chile, Central Bank of Chile 91, Central Bank of Chile.
  2. Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 443, Board of Governors of the Federal Reserve System (U.S.).
  3. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
  4. Aart Kraay & Jaume Ventura, 2002. "Current Accounts in the Long and Short Run," NBER Working Papers 9030, National Bureau of Economic Research, Inc.
  5. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(2), pages 571-608, June.
  6. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  7. Kraay, Aart & Ventura, Jaume, 1997. "Current accounts in debtor and creditor countries," Policy Research Working Paper Series 1825, The World Bank.
  8. Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," Papers, Brookings Institution - Working Papers 64, Brookings Institution - Working Papers.
  9. Loayza, Norman & Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "What drives private saving around the world?," Policy Research Working Paper Series 2309, The World Bank.
  10. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  11. Maurice Obstfeld & Kenneth Rogoff, 1994. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
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Cited by:
  1. Fernando Broner & Jaume Ventura, 2010. "Rethinking the effects of financial liberalization," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1128, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2013.
  2. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
  3. Georgopoulos, George & Hejazi, Walid, 2009. "The Feldstein-Horioka puzzle revisited: Is the home-bias much less?," International Review of Economics & Finance, Elsevier, Elsevier, vol. 18(2), pages 341-350, March.
  4. Herrmann, Sabine & Jochem, Axel, 2005. "Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area," Discussion Paper Series 1: Economic Studies 2005,32, Deutsche Bundesbank, Research Centre.
  5. Helmut Herwartz & Florian Siedenburg, 2007. "Determinants of Current Account Imbalances in 16 OECD Countries: An Out-Of-Sample Perspective," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 143(2), pages 349-374, July.
  6. Sebastián Edwards, 2008. "On Current Account Surpluses and the Correction of Global Imbalances," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmid (ed.), Current Account and External Financing, edition 1, volume 12, chapter 2, pages 025-083 Central Bank of Chile.
  7. Chayawadee Chai-anant & Ubonrat Jantarang, 2004. "Current Account Adjustment and Policy Instrument Responsiveness," Working Papers, Economic Research Department, Bank of Thailand 2004-04, Economic Research Department, Bank of Thailand.

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