A new perspective on "the new rule"of the current account
AbstractIn an influential series of contributions, Kraay and Ventura (2000, 2003) offer a "new rule" for the current account: in response to a temporary income shock, the change in the current account is equal to the change in saving times the ratio of net foreign assets to wealth. We analyze the impact of a temporary income shock on the current account in the context of a two-country dynamic general equilibrium model of portfolio choice and show that the new rule does not hold. We also show that the cross-section evidence reported by Kraay and Ventura in favor of the new rule is a feature implied by the steady state of the model that is conceptually distinct from the new rule. We argue that the new rule could only hold in a model with one-way capital flows (only inflows or outflows, but not both), a feature that is strongly counterfactual.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Economics.
Volume (Year): 80 (2010)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/505552
International capital flows The current account The new rule;
Other versions of this item:
- Eric van Wincoop & Cedric Tille, 2008. "A New Perspective on "The New Rule"of the Current Account," 2008 Meeting Papers 452, Society for Economic Dynamics.
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