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

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  • Mercereau Benoit

    (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))

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.

Suggested Citation

  • Mercereau Benoit, 2003. "The Role of Stock Markets in Current Account Dynamics: a Time Series Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, April.
    • Handle: RePEc:bpj:bejmac:v:topics.3:y:2003:i:1:n:6
    DOI: 10.2202/1534-5998.1063
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    Citations

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    Cited by:

    1. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
    2. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
    3. Rangan Gupta & Anandamayee Majumdar & Mark E. Wohar, 2017. "The Role of Current Account Balance in Forecasting the US Equity Premium: Evidence From a Quantile Predictive Regression Approach," Open Economies Review, Springer, vol. 28(1), pages 47-59, February.
    4. Komain Jiranyakul, 2017. "Asset Prices, Real Exchange Rate and Current Account Fluctuations: Some Structural VAR Evidence for Thailand," Business and Economic Research, Macrothink Institute, vol. 7(2), pages 163-177, December.
    5. Mercereau, Benoit, 2006. "Stock markets and the real exchange rate: An intertemporal approach," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1130-1145, November.
    6. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    7. Benoît Mercereau, 2003. "Stock Markets and the Real Exchange Rate: An Intertemporal Approach," IMF Working Papers 2003/109, International Monetary Fund.
    8. Kitamura, Yoshihiro, 2009. "The current account and stock returns," Research in International Business and Finance, Elsevier, vol. 23(3), pages 302-321, September.

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