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Current Accounts in Debtor and Creditor Countries

Author

Listed:
  • Aart Kraay
  • Jaume Ventura

Abstract

What is the current account response to transitory income shocks such as temporary changes in the terms of trade, transfers from abroad, or fluctuations in production? We propose this new rule: the current account response equals the saving generated by the shock multiplied by the country's share of foreign assets in total assets. This rule implies that favorable shocks lead to deficits (surpluses) in debtor (creditor) countries. This rule is a natural implication of the intertemporal approach to the current account if investment risk is high and diminishing returns are weak. Evidence from industrial countries broadly supports this rule.

Suggested Citation

  • 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.
    • Handle: RePEc:oup:qjecon:v:115:y:2000:i:4:p:1137-1166.
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    File URL: http://hdl.handle.net/10.1162/003355300555033
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    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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