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Current Account Theory and the Dynamics of US Net Foreign Liabilities

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  • Corsetti, Giancarlo
  • Konstantinou, Panagiotis T

Abstract

This paper provides empirical evidence on the adjustment dynamics of the US net foreign liabilities, net output and consumption. We use empirical techniques that allow us to quantify the relative importance of permanent and transitory innovations. We find that transitory shocks contribute considerably to the variation in all three variables for a horizon up to a year, and their contribution remains significant for a horizon up to five years. A permanent shock – that we interpret as a technological shock – dominates the variation of all variables at longer horizons. In response to this shock, net foreign liabilities, net output and consumption all increase – consistent with the effect of productivity gains raising domestic return to capital and thus generating an inflow of foreign capital. Conversely, shocks that cause net output and consumption to increase temporarily are accompanied by short-run accumulation of net foreign assets – in contrast with traditional model predicting procyclical current account deficits in response to temporary output fluctuations. Instead, our results are qualitatively consistent with predictions of the intertemporal approach to the current account.

Suggested Citation

  • Corsetti, Giancarlo & Konstantinou, Panagiotis T, 2005. "Current Account Theory and the Dynamics of US Net Foreign Liabilities," CEPR Discussion Papers 4920, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4920
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    Citations

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    Cited by:

    1. Peter Claeys, 2007. "Estimating the effects of fiscal policy under the budget constraint," IREA Working Papers 200715, University of Barcelona, Research Institute of Applied Economics, revised Jul 2007.
    2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "A Global Perspective on External Positions," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102 National Bureau of Economic Research, Inc.
    3. Benigno, Pierpaolo, 2009. "Are valuation effects desirable from a global perspective?," Journal of Development Economics, Elsevier, vol. 89(2), pages 170-180, July.
    4. repec:tcd:wpaper:tep16 is not listed on IDEAS
    5. Takeuchi, Fumihide, 2010. "US external debt sustainability revisited: Bayesian analysis of extended Markov switching unit root test," Japan and the World Economy, Elsevier, vol. 22(2), pages 98-106, March.

    More about this item

    Keywords

    consumption smoothing; current account; international adjustment mechanism; intertemporal approach to the current account; net foreign wealth; permanent-transitory decomposition;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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