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The current account and the new rule in a not-so-small open economy

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  • Iñaki Erauskin-Iurrita

    (Universidad de Deusto-ESTE)

Abstract

This paper provides an extension of the new rule for the current account [Kraay and Ventura (2000)], abandoning the small open economy assumption: the response of transitory income shocks on the current account is equal to the new rule (savings generated by the shock multiplied by the domestic holdings of foreign assets over total domestic assets) plus the saving generated by the shock in the foreign economy multiplied by the foreign country’s share of domestic capital in foreign total assets. The extended new rule provides a good description for the behavior of current accounts, and is even better than the new rule, which would be rejected by recent evidence.

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Bibliographic Info

Article provided by Fundación SEPI in its journal Investigaciones Economicas.

Volume (Year): 33 (2009)
Issue (Month): 3 (September)
Pages: 529-557

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Handle: RePEc:iec:inveco:v:33:y:2009:i:3:p:529-557

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Related research

Keywords: Current account; intertemporal approach; traditional rule; new rule.;

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References

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  1. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2000. "Country portfolios," Economics Working Papers 913, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262561042, December.
  3. Domenico Giannone & Michele Lenza, 2009. "The Feldstein-Horioka fact," NBER Working Papers 15519, National Bureau of Economic Research, Inc.
    • Domenico Giannone & Michele Lenza, 2010. "The Feldstein-Horioka Fact," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 103-117 National Bureau of Economic Research, Inc.
  4. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  5. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  6. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
  8. Jaume Ventura, 2001. "A Portfolio View of the U.S. Current Account Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 241-258.
  9. Kraay, Aart & Ventura, Jaume, 1997. "Current accounts in debtor and creditor countries," Policy Research Working Paper Series 1825, The World Bank.
  10. Aart Kraay & Jaume Ventura, 2003. "Current Accounts in the Long and the Short Run," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 65-112 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.
  12. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August.
  13. Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 147-210.
  14. Devereux, Michael B. & Saito, Makoto, 1997. "Growth and risk-sharing with incomplete international assets markets," Journal of International Economics, Elsevier, vol. 42(3-4), pages 453-481, May.
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Cited by:
  1. Iñaki Erauskin, 2011. "Financial openness, volatility, and the size of productive government," SERIEs, Spanish Economic Association, vol. 2(2), pages 233-253, June.
  2. Erauskin, Iñaki, 2013. "The impact of financial openness on the size of utility-enhancing government," Economics Discussion Papers 2013-7, Kiel Institute for the World Economy.

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