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Current Accounts in the Long and Short Run

  • Aart Kraay
  • Jaume Ventura

Faced with income fluctuations, countries smooth their consumption by raising savings when income is high, and vice versa. How much of these savings do countries invest at home and abroad? In other words, what are the effects of fluctuations in savings on domestic investment and the current account? In the long run, we find that countries invest the marginal unit of savings in domestic and foreign assets in the same proportions as in their initial portfolio, so that the latter is remarkably stable. In the short run, we find that countries invest the marginal unit of savings mostly in foreign assets, and only gradually do they rebalance their portfolio back to its original composition. This means that countries not only try to smooth consumption, but also domestic investment. To achieve this, they use foreign assets as a buffer stock.

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File URL: http://www.nber.org/papers/w9030.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9030.

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Date of creation: Jun 2002
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Publication status: published as Gertler, Mark and Kenneth S. Rogoff (eds.) NBER Macroeconomics Annual 2002, Volume 17. Cambridge, MA: The MIT Press, 2003.
Handle: RePEc:nbr:nberwo:9030
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  10. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
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  12. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
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  17. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
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