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Towards a Theory of Current Accounts

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  • Jaume Ventura

Abstract

The current accounts data of industrial countries exhibits some strong patterns that are inconsistent with the intertemporal approach to the current account. This is the basic model that international economists have been using for more than two decades to think about current account issues. This paper shows that it is possible to go a long way towards reconciling the theory and the data by introducing two additional features to the basic model: investment risk and adjustment costs to investment. Moreover, these extensions generate new and unexpected theoretical predictions that receive substantial support in the data. The overall message is therefore positive: with a couple of reasonable modifications, the intertemporal approach to the current account provides a fairly good description of the industrial country data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9163.

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Date of creation: Sep 2002
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Publication status: published as Jaume Ventura, 2003. "Towards a Theory of Current Accounts," The World Economy, Blackwell Publishing, vol. 26(4), pages 483-512, 04.
Handle: RePEc:nbr:nberwo:9163

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  1. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2000. "Country portfolios," Economics Working Papers 913, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(1), pages 159-192, February.
  3. Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," RCER Working Papers 154, University of Rochester - Center for Economic Research (RCER).
  4. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers, Tel Aviv - the Sackler Institute of Economic Studies 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  5. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C94-044, University of California at Berkeley.
  6. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 314-29, June.
  7. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 222-26, May.
  8. Loayza, Norman & Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "What drives private saving around the world?," Policy Research Working Paper Series 2309, The World Bank.
  9. Kraay, Aart & Ventura, Jaume, 1997. "Current accounts in debtor and creditor countries," Policy Research Working Paper Series 1825, The World Bank.
  10. Kraay, Aart & Ventura, Jaume, 2002. "Current Accounts in the Long and Short Run," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3440, C.E.P.R. Discussion Papers.
  11. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
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Cited by:
  1. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
  2. Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
  3. Chayawadee Chai-anant & Ubonrat Jantarang, 2004. "Current Account Adjustment and Policy Instrument Responsiveness," Working Papers 2004-04, Economic Research Department, Bank of Thailand.
  4. Sebastián Edwards, 2008. "On Current Account Surpluses and the Correction of Global Imbalances," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmid (ed.), Current Account and External Financing, edition 1, volume 12, chapter 2, pages 025-083 Central Bank of Chile.
  5. Georgopoulos, George & Hejazi, Walid, 2009. "The Feldstein-Horioka puzzle revisited: Is the home-bias much less?," International Review of Economics & Finance, Elsevier, Elsevier, vol. 18(2), pages 341-350, March.
  6. Helmut Herwartz & Florian Siedenburg, 2007. "Determinants of Current Account Imbalances in 16 OECD Countries: An Out-Of-Sample Perspective," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 143(2), pages 349-374, July.
  7. 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.

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