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What Drives US Foreign Borrowing? Evidence on External Adjustment to Transitory and Permanent Shocks

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  • Corsetti, Giancarlo
  • Konstantinou, Panagiotis T

Abstract

The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7134.

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Date of creation: Jan 2009
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Handle: RePEc:cpr:ceprdp:7134

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Keywords: Consumption Smoothing; Current Account; International Adjustment Mechanism; Intertemporal Approach to the Current Account; Net Foreign Wealth; Permanent-Transitory Decomposition;

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