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A Note on the New Rule for the Current Account

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  • Iñaki Erauskin

Abstract

In this note, we show that the two main concerns against the new rule for the current account are flawed. The new rule states that the impact of a transitory income shock on the current account is given by the savings generated by the shock multiplied by the ratio of the net foreign asset position to domestic wealth. First, we adapt the new rule to distinguish between gross and net foreign asset positions. Second, we demonstrate that the results for the new rule are driven neither by an accounting-based “approximate” regression nor a steady state.

Suggested Citation

  • Iñaki Erauskin, 2015. "A Note on the New Rule for the Current Account," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 509-524, August.
    • Handle: RePEc:bla:reviec:v:23:y:2015:i:3:p:509-524
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    File URL: http://hdl.handle.net/10.1111/roie.12184
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    References listed on IDEAS

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    1. Aart Kraay & Jaume Ventura, 2000. "Current Accounts in Debtor and Creditor Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(4), pages 1137-1166.
    2. Erauskin, Iñaki, 2013. "The impact of financial openness on the size of utility-enhancing government," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy, vol. 7, pages 1-56.
    3. Guo, Kai & Jin, Keyu, 2009. "Composition and growth effects of the current account: A synthesized portfolio view," Journal of International Economics, Elsevier, vol. 79(1), pages 31-41, September.
    4. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," The Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-188.
    5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    6. Jaume Ventura, 2001. "A Portfolio View of the U.S. Current Account Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 241-258.
    7. Devereux, Michael B. & Saito, Makoto, 1997. "Growth and risk-sharing with incomplete international assets markets," Journal of International Economics, Elsevier, vol. 42(3-4), pages 453-481, May.
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    1. Erauskin, Iñaki, 2015. "Savings, the size of the net foreign asset position, and the dynamics of current accounts," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 353-370.
    2. Erauskin, Iñaki & Gardeazabal, Javier, 2017. "The terms of trade, the external balance, and the size of the net foreign asset position," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 245-260.

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