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Towards a Theory of Current Accounts

  • Jaume Ventura

The current accounts data of industrial countries exhibits some strong patterns that are inconsistent with the intertemporal approach to the current account. This is the basic model that international economists have been using for more than two decades to think about current account issues. This paper shows that it is possible to go a long way towards reconciling the theory and the data by introducing two additional features to the basic model: investment risk and adjustment costs to investment. Moreover, these extensions generate new and unexpected theoretical predictions that receive substantial support in the data. The overall message is therefore positive: with a couple of reasonable modifications, the intertemporal approach to the current account provides a fairly good description of the industrial country data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9163.

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Date of creation: Sep 2002
Date of revision:
Publication status: published as Jaume Ventura, 2003. "Towards a Theory of Current Accounts," The World Economy, Blackwell Publishing, vol. 26(4), pages 483-512, 04.
Handle: RePEc:nbr:nberwo:9163
Note: IFM
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  1. Kraay, Aart & Ventura, Jaume, 1997. "Current accounts in debtor and creditor countries," Policy Research Working Paper Series 1825, The World Bank.
  2. Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," RCER Working Papers 154, University of Rochester - Center for Economic Research (RCER).
  3. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers C94-044, University of California at Berkeley.
  5. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  6. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February.
  7. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  8. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2005. "Country Portfolios," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 914-945, 06.
  9. 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.
  10. Aart Kraay & Jaume Ventura, 2002. "Current Accounts in the Long and Short Run," NBER Working Papers 9030, National Bureau of Economic Research, Inc.
  11. Loayza, Norman & Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "What drives private saving around the world?," Policy Research Working Paper Series 2309, The World Bank.
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