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Current accounts, net foreign assets and the implications of cyclical factors

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  • Matthieu Bussiere
  • Georgios Chortareas
  • Rebecca L Driver

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 stylised 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. A model is estimated 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. The results, from a panel of 18 OECD countries, suggest that initial portfolio allocation affects current account behaviour following temporary, but not permanent, shocks. These results are therefore compatible with the 'new rule'.

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Paper provided by Bank of England in its series Bank of England working papers with number 173.

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Date of creation: Jan 2003
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Handle: RePEc:boe:boeewp:173

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Citations

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Cited by:
  1. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
  2. Durand, C. & Lopez, C., 2012. "Taux de change d’équilibre et mesure de la compétitivité au sein de la zone euro," Bulletin de la Banque de France, Banque de France, issue 190, pages 125-134.
  3. Barisone, Giacomo & Driver, Rebecca L. & Wren-Lewis, Simon, 2006. "Are our FEERs justified?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 741-759, August.
  4. 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.
  5. Guo, Kai & Jin, Keyu, 2009. "Composition and growth effects of the current account: A synthesized portfolio view," Journal of International Economics, Elsevier, vol. 79(1), pages 31-41, 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, vol. 5(3), pages 239-252.
  7. Alessandro Girardi & Paolo Paesani, 2008. "The Transfer Problem in the Euro Area," Open Economies Review, Springer, vol. 19(4), pages 517-537, September.
  8. Abdelaziz Rouabah, 2005. "Les déterminants du solde de la balance des transactions courantes au Luxembourg," BCL working papers 13, Central Bank of Luxembourg.
  9. Alessandro Girardi & Paolo Paesani, 2005. "Net Foreign Assets in the Euro Area: A Cointegration Analysis," Working Papers 76, University of Rome La Sapienza, Department of Public Economics.
  10. Rimgailaite, Ramune, 2012. "Exchange rate modelling for Lithuania and Switzerland," MPRA Paper 43451, University Library of Munich, Germany.
  11. 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, 02.
  12. 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 72, Money Macro and Finance Research Group.
  13. Arghyrou, Michael G & Chortareas, Georgios, 2006. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Cardiff Economics Working Papers E2006/23, Cardiff University, Cardiff Business School, Economics Section.

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