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Current accounts in debtor and creditor countries

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  • Kraay, Aart
  • Ventura, Jaume

Abstract

The authors reexamine a classic question in international economics: What is the current account response to a transitory income shock such as a temporary improvement in the terms of trade, a transfer from abroad, or unusually high production? To answer this question, they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities. Despite its conventional ingredients, the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries. Evidence from thirteen OECD countries broadly supports this theoretical prediction.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1825.

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Date of creation: 30 Sep 1997
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Handle: RePEc:wbk:wbrwps:1825

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Fiscal&Monetary Policy; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Economic Theory&Research; Environmental Economics&Policies; International Terrorism&Counterterrorism; Banks&Banking Reform; Financial Intermediation;

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  1. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 141-53, February.
  2. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 16(3-4), pages 427-449.
  3. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier.
  4. Clarida, Richard H, 1990. "International Lending and Borrowing in a Stochastic, Stationary Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 543-58, August.
  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. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
  7. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, Elsevier, vol. 23(3-4), pages 299-313, November.
  8. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 57-84, February.
  9. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  10. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 97-125, February.
  11. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(1), pages 43-65, February.
  12. Costello, Donna M, 1993. "A Cross-Country, Cross-Industry Comparison of Productivity Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 207-22, April.
  13. Linda L. Tesar & Ingrid M. Werner, 1992. "Home Bias and the High Turnover," NBER Working Papers 4218, National Bureau of Economic Research, Inc.
  14. Devereux, Michael B. & Saito, Makoto, 1997. "Growth and risk-sharing with incomplete international assets markets," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 453-481, May.
  15. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 84(2), pages 147-59.
  16. Kraay, Aart & Ventura, Jaume, 1995. "Trade and fluctuations," Policy Research Working Paper Series 1560, The World Bank.
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