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Composition and growth effects of the current account: A synthesized portfolio view


  • Guo, Kai
  • Jin, Keyu


This paper analyzes a useful accounting framework that breaks down the current account to two components: a composition effect and a growth effect. We show that past empirical evidence, which strongly supports the growth effect as the main driver of current account dynamics, is misconceived. The remarkable empirical success of the growth effect is driven by the dominance of the cross-sectional variation, which, under conditions met by the data, is generated by an accounting approximation. In contrast to previous findings that the portfolio share of net foreign assets to total assets is constant in a country, both our theoretical and empirical results support a highly persistent process or a unit-root process, with some countries displaying a trend. Finally, we reestablish the composition effect as the quantitatively dominant driving force of current account dynamics in the past data.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:inecon:v:79:y:2009:i:1:p:31-41

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    References listed on IDEAS

    1. 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.
    2. Matthieu Bussiere & Georgios Chortareas & Rebecca Driver, 2003. "Current Accounts, Net Foreign Assets and the Implications of Cyclical Factors," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 269-286, Spring.
    3. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    4. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
    5. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    6. Aart Kraay & Jaume Ventura, 2003. "Current Accounts in the Long and the Short Run," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 65-112 National Bureau of Economic Research, Inc.
    7. Blanchard, Olivier & Giavazzi, Francesco & Sá, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
    8. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
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    Cited by:

    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. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
    3. Lone Christiansen & Alessandro Prati & Luca Antonio Ricci & Thierry Tressel, 2010. "External Balance in Low-Income Countries," NBER Chapters,in: NBER International Seminar on Macroeconomics 2009, pages 265-322 National Bureau of Economic Research, Inc.
    4. Oeking, Anne & Zwick, Lina, 2015. "On the relation between capital flows and the current account," Ruhr Economic Papers 565, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Didier, Tatiana & Lowenkron, Alexandre, 2012. "The current account as a dynamic portfolio choice problem," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 518-541.
    6. 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.
    7. repec:eee:reveco:v:50:y:2017:i:c:p:245-260 is not listed on IDEAS


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