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The current account as a dynamic portfolio choice problem

  • Didier, Tatiana
  • Lowenkron, Alexandre

The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into a portfolio rebalancing and a portfolio growth component. This paper provides empirical evidence of the importance of portfolio rebalancing for the dynamics of the current account. The authors evaluate the predictions of a partial-equilibrium model of the current account with dynamic portfolio choices, in which portfolio rebalancing is driven by changes in investment opportunities. Using data for the United States and Japan, the authors find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4861.

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Date of creation: 01 Mar 2009
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Handle: RePEc:wbk:wbrwps:4861
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