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What Drives US Foreign Borrowing? Evidence on External Adjustment to Transitory and Permanent Shocks

The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction.

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Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2009_03.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:mcd:mcddps:2009_03
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