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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 portfolio rebalancing and portfolio growth components, as highlighted by theoretical models. The empirical literature draws attention to the relative importance of portfolio rebalancing to explain fluctuations in capital flows, although they do not shed light on the mechanisms behind these rebalancing effects. In this paper, we provide empirical evidence of the importance of portfolio rebalancing driven by changes in investment opportunities for the dynamics of the current account. In particular, we 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 expected asset returns. Focusing on the dynamics of the current account between Japan and the US, we find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jjieco:v:26:y:2012:i:4:p:518-541 DOI: 10.1016/j.jjie.2012.08.005
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    Cited by:

    1. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, pages 157-175.
    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.
    3. Evans, Martin D.D. & Hnatkovska, Viktoria V., 2014. "International capital flows, returns and world financial integration," Journal of International Economics, Elsevier, pages 14-33.

    More about this item

    Keywords

    International investment; Portfolio choice; Current account balance;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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