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Current Account Theory and the Dynamics of US Net Foreign Liabilities

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  • Corsetti, Giancarlo
  • Konstantinou, Panagiotis T

Abstract

This paper provides empirical evidence on the adjustment dynamics of the US net foreign liabilities, net output and consumption. We use empirical techniques that allow us to quantify the relative importance of permanent and transitory innovations. We find that transitory shocks contribute considerably to the variation in all three variables for a horizon up to a year, and their contribution remains significant for a horizon up to five years. A permanent shock – that we interpret as a technological shock – dominates the variation of all variables at longer horizons. In response to this shock, net foreign liabilities, net output and consumption all increase – consistent with the effect of productivity gains raising domestic return to capital and thus generating an inflow of foreign capital. Conversely, shocks that cause net output and consumption to increase temporarily are accompanied by short-run accumulation of net foreign assets – in contrast with traditional model predicting procyclical current account deficits in response to temporary output fluctuations. Instead, our results are qualitatively consistent with predictions of the intertemporal approach to the current account.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4920.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4920

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Related research

Keywords: consumption smoothing; current account; international adjustment mechanism; intertemporal approach to the current account; net foreign wealth; permanent-transitory decomposition;

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Cited by:
  1. Pierpaolo Benigno, 2006. "Are Valuation Effects Desirable from a Global Perspective?," NBER Working Papers 12219, National Bureau of Economic Research, Inc.
  2. Takeuchi, Fumihide, 2010. "US external debt sustainability revisited: Bayesian analysis of extended Markov switching unit root test," Japan and the World Economy, Elsevier, vol. 22(2), pages 98-106, March.
  3. Claeys Peter, 2008. "Estimating the effects of fiscal policy under the budget constraint," wp.comunite 0038, Department of Communication, University of Teramo.
  4. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers 2000516, Trinity College Dublin, Department of Economics.
  5. repec:tcd:wpaper:tep16 is not listed on IDEAS

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