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The current account as a dynamic portfolio choice problem

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  • Didier, Tatiana
  • Lowenkron, Alexandre

Abstract

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.

Suggested Citation

  • Didier, Tatiana & Lowenkron, Alexandre, 2009. "The current account as a dynamic portfolio choice problem," Policy Research Working Paper Series 4861, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4861
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    References listed on IDEAS

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    Cited by:

    1. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, pages 157-175.
    2. Evans, Martin D.D. & Hnatkovska, Viktoria V., 2014. "International capital flows, returns and world financial integration," Journal of International Economics, Elsevier, pages 14-33.

    More about this item

    Keywords

    Debt Markets; Emerging Markets; Economic Theory&Research; Currencies and Exchange Rates; Investment and Investment Climate;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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