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Current Accounts, Net Foreign Assets and the Implications of Cyclical Factors

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  • Matthieu Bussiere

    (European University Institute)

  • Georgios Chortareas

    (Bank of England)

  • Rebecca Driver

    ()
    (External MPC Unit, Bank of England)

Abstract

Intertemporal models of the current account suggest that temporary income shocks are fully reflected in a country's net foreign asset position, so that agents invest abroad any savings generated by a positive income shock. On the other hand, a stylized fact in international economics is that there is a disproportionately large share of domestic assets in investors' portfolios. If investment risk is high and diminishing returns are weak, then savings from temporary income shocks may, in fact, be invested according to the existing portfolio composition. This implies that any bias in portfolios persists after a temporary shock. We estimate a model that explicitly allows for the possibility that the impact of initial portfolio allocation, proxied using net foreign assets, may differ, depending on whether shocks are permanent or temporary. Our results, from a panel of 18 OECD countries, suggest that initial portfolio allocation affects current account behavior following temporary, but not permanent, shocks. These results are therefore compatible with the "new rule".

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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 29 (2003)
Issue (Month): 2 (Spring)
Pages: 269-286

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Handle: RePEc:eej:eeconj:v:29:y:2003:i:2:p:269-286

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Keywords: Current Account; Investment; Saving;

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Cited by:
  1. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 21(1), pages 25-64, 02.
  2. C. Durand. & C. Lopez., 2012. "Equilibrium exchange rate and competitiveness within the euro area," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, Banque de France, issue 28, pages 87-100, Winter.
  3. Barisone, G. & Driver, R.L. & Wren-Lewis, S., 2000. "Are Our FEERs Justified?," Discussion Papers, Exeter University, Department of Economics 0002, Exeter University, Department of Economics.
  4. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers, Bank of England 248, Bank of England.
  5. Alessandro Girardi & Paolo Paesani, 2008. "The Transfer Problem in the Euro Area," Open Economies Review, Springer, Springer, vol. 19(4), pages 517-537, September.
  6. Michał Brzozowski & Sadananda Prusty, 2013. "Impact of GDP volatility on current account balances," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 5(3), pages 239-252.
  7. Michael G. Arghyrou & Georgios Chortareas, 2008. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 16(4), pages 747-764, 09.
  8. 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.
  9. Abdelaziz Rouabah, 2005. "Les déterminants du solde de la balance des transactions courantes au Luxembourg," BCL working papers, Central Bank of Luxembourg 13, Central Bank of Luxembourg.
  10. Huseyin Kalyoncu & Naveed Naqvi & Christopher Tsoukis, 2004. "Industrial Production and the Current Account: Theory and Panel Data Evidence from the OECD," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 72, Money Macro and Finance Research Group.
  11. Alessandro Girardi & Paolo Paesani, 2005. "Net Foreign Assets in the Euro Area: A Cointegration Analysis," Working Papers, University of Rome La Sapienza, Department of Public Economics 76, University of Rome La Sapienza, Department of Public Economics.
  12. Rimgailaite, Ramune, 2012. "Exchange rate modelling for Lithuania and Switzerland," MPRA Paper 43451, University Library of Munich, Germany.
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