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Current Accounts in the Long and Short Run

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  • Kraay, Aart
  • Ventura, Jaume

Abstract

Faced with income fluctuations, countries smooth their consumption by raising savings when income is high, and vice versa. How much of these savings do countries invest at home and abroad? In other words, what are the effects of fluctuations in savings on domestic investment and the current account? In the long-run, we find that countries invest the marginal unit of savings in domestic and foreign assets in the same proportions as in their initial portfolio, so that the latter is remarkably stable. In the short run, we find that countries invest the marginal unit of savings mostly in foreign assets, and only gradually do they rebalance their portfolio back to its original composition. This means that countries not only try to smooth consumption, but also domestic investment. To achieve this, they use foreign assets as a buffer stock.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3440.

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Date of creation: Jul 2002
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Handle: RePEc:cpr:ceprdp:3440

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Keywords: current account adjustment; international capital flow; short- and long-run;

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  1. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  2. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2005. "Country Portfolios," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(4), pages 914-945, 06.
  3. Tesar, Linda L., 1991. "Savings, investment and international capital flows," Journal of International Economics, Elsevier, vol. 31(1-2), pages 55-78, August.
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  7. Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 443, Board of Governors of the Federal Reserve System (U.S.).
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