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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4920.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Philip R. Lane & Gian Maria Milesi-Ferretti, 2007.
"A Global Perspective on External Positions,"
NBER Chapters,
in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102
National Bureau of Economic Research, Inc.
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