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Current Accounts In Debtor And Creditor Countries

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  • Aart Kraay
  • Jaume Ventura

Abstract

What is the current account response to transitory income shocks such as temporary changes in the terms of trade, transfers from abroad, or fluctuations in production? We propose this new rule: the current account response equals the saving generated by the shock multiplied by the country's share of foreign assets in total assets. This rule implies that favorable shocks lead to deficits (surpluses) in debtor (creditor) countries. This rule is a natural implication of the intertemporal approach to the current account if investment risk is high and diminishing returns are weak. Evidence from industrial countries broadly supports this rule. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 115 (2000)
Issue (Month): 4 (November)
Pages: 1137-1166

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Handle: RePEc:tpr:qjecon:v:115:y:2000:i:4:p:1137-1166

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