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

Author

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  • Giancarlo Corsetti
  • Panagiotis T. Konstantinou

Abstract

The joint dynamics of US net output, consumption, and (the market value of) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson (2004), is shown to be consistent with current account theory. US consumption is virtually insulated from transitory shocks, while these contribute to variations in net output and gross foreign positions--consumption is smoothed against temporary fluctuations in returns. A single permanent shock--naturally interpreted as a supply shock--raises consumption swiftly while causing net output to adjust gradually. This leads to persistent, procyclical external deficits, while moving gross assets and liabilities in the same direction. (JEL E21, E23, F32, F34)

Suggested Citation

  • Giancarlo Corsetti & Panagiotis T. Konstantinou, 2012. "What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1062-1092, April.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:2:p:1062-92
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Evans, Martin D.D., 2014. "External balances, trade flows and financial conditions," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 271-290.
    2. D.D. Evans, Martin, 2017. "External balances, trade and financial conditions," Journal of International Economics, Elsevier, vol. 107(C), pages 165-184.
    3. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 103-155.
    4. Christian Grisse & Thomas Nitschka, 2016. "Exchange Rate Returns and External Adjustment: Evidence from Switzerland," Open Economies Review, Springer, vol. 27(2), pages 317-339, April.
    5. Ahmed, Shamim & Valente, Giorgio, 2015. "Understanding the price of volatility risk in carry trades," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 118-129.
    6. Sauré, Philip, 2017. "Time-intensive R&D and unbalanced trade," European Economic Review, Elsevier, vol. 91(C), pages 229-244.
    7. Jacob, Punnoose & Peersman, Gert, 2013. "Dissecting the dynamics of the US trade balance in an estimated equilibrium model," Journal of International Economics, Elsevier, vol. 90(2), pages 302-315.
    8. Stefan Notz & Peter Rosenkranz, 2014. "Business cycles in emerging markets: the role of liability dollarization and valuation effects," ECON - Working Papers 163, Department of Economics - University of Zurich.
    9. repec:eee:streco:v:45:y:2018:i:c:p:77-83 is not listed on IDEAS
    10. repec:bla:reviec:v:25:y:2017:i:1:p:165-194 is not listed on IDEAS
    11. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, Elsevier.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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