Working Paper: CEPR ID: DP3545
Authors: Jaume Ventura
Abstract: 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.
Keywords: current account; theory; short and long-term capital flows
JEL Codes: F21; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in saving (D14) | current account (F32) |
| investment rates (G31) | current account (F32) |
| growth rates of population (J11) | investment rates (G31) |
| growth rates of productivity (O49) | investment rates (G31) |
| investment risk and adjustment costs (G31) | relationship between saving and current account (F32) |