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The current account as a dynamic portfolio choice problem

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  • Didier, Tatiana
  • Lowenkron, Alexandre

Abstract

The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into a portfolio rebalancing and a portfolio growth component. This paper provides empirical evidence of the importance of portfolio rebalancing for the dynamics of the current account. The authors evaluate the predictions of a partial-equilibrium model of the current account with dynamic portfolio choices, in which portfolio rebalancing is driven by changes in investment opportunities. Using data for the United States and Japan, the authors find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4861.

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Date of creation: 01 Mar 2009
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Handle: RePEc:wbk:wbrwps:4861

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Keywords: Debt Markets; Emerging Markets; Economic Theory&Research; Currencies and Exchange Rates; Investment and Investment Climate;

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Cited by:
  1. Tille, Cédric & van Wincoop, Eric, 2008. "International Capital Flows," CEPR Discussion Papers 6705, C.E.P.R. Discussion Papers.
  2. Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University), 2005. "International Capital Flows, Returns and World Financial Integration," Working Papers gueconwpa~05-05-17, Georgetown University, Department of Economics.

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