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The current account and the new rule in a not-so-small open economy

  • Iñaki Erauskin-Iurrita

    (Universidad de Deusto-ESTE)

This paper provides an extension of the new rule for the current account [Kraay and Ventura (2000)], abandoning the small open economy assumption: the response of transitory income shocks on the current account is equal to the new rule (savings generated by the shock multiplied by the domestic holdings of foreign assets over total domestic assets) plus the saving generated by the shock in the foreign economy multiplied by the foreign country’s share of domestic capital in foreign total assets. The extended new rule provides a good description for the behavior of current accounts, and is even better than the new rule, which would be rejected by recent evidence.

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Article provided by Fundación SEPI in its journal Investigaciones Economicas.

Volume (Year): 33 (2009)
Issue (Month): 3 (September)
Pages: 529-557

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Handle: RePEc:iec:inveco:v:33:y:2009:i:3:p:529-557
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  1. Domenico Giannone & Michele Lenza, 2009. "The Feldstein-Horioka fact," NBER Working Papers 15519, National Bureau of Economic Research, Inc.
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  2. Kraay, A. & Ventura, J., 1997. "Current Acounts in Debtor and Creditor Countries," Working papers 97-12, Massachusetts Institute of Technology (MIT), Department of Economics.
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  9. 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.
  10. 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.
  11. 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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  14. 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.
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