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Towards a Theory of Current Accounts

  • Jaume Ventura

    (CREI-UPF and MIT)

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. Copyright � Blackwell Publishing Ltd 2003.

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Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 26 (2003)
Issue (Month): 4 (04)
Pages: 483-512

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Handle: RePEc:bla:worlde:v:26:y:2003:i:4:p:483-512
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  1. Kraay, Aart & Ventura, Jaume, 1997. "Current accounts in debtor and creditor countries," Policy Research Working Paper Series 1825, The World Bank.
  2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  3. Loayza, Norman & Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "What drives private saving around the world?," Policy Research Working Paper Series 2309, The World Bank.
  4. Tesar, Linda L., 1991. "Savings, investment and international capital flows," Journal of International Economics, Elsevier, vol. 31(1-2), pages 55-78, August.
  5. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  6. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
  7. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February.
  8. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  9. Aart Kraay & Jaume Ventura, 2002. "Current Accounts in the Long and Short Run," NBER Working Papers 9030, National Bureau of Economic Research, Inc.
  10. Aart Kraay & Norman Loayza & Luis Servén, 2001. "Country portfolios," Working Papers Central Bank of Chile 91, Central Bank of Chile.
  11. Aart Kraay & Jaume Ventura, 2000. "Current Accounts in Debtor and Creditor Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1137-1166.
  12. 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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