Working Paper: CEPR ID: DP4920
Authors: Giancarlo Corsetti; Panagiotis T. Konstantinou
Abstract: This paper provides empirical evidence on the adjustment dynamics of the US net foreign liabilities, net output and consumption. We use empirical techniques that allow us to quantify the relative importance of permanent and transitory innovations. We find that transitory shocks contribute considerably to the variation in all three variables for a horizon up to a year, and their contribution remains significant for a horizon up to five years. A permanent shock ? that we interpret as a technological shock ? dominates the variation of all variables at longer horizons. In response to this shock, net foreign liabilities, net output and consumption all increase ? consistent with the effect of productivity gains raising domestic return to capital and thus generating an inflow of foreign capital. Conversely, shocks that cause net output and consumption to increase temporarily are accompanied by short-run accumulation of net foreign assets ? in contrast with traditional model predicting procyclical current account deficits in response to temporary output fluctuations. Instead, our results are qualitatively consistent with predictions of the intertemporal approach to the current account.
Keywords: Consumption Smoothing; Current Account; International Adjustment Mechanism; Intertemporal Approach to the Current Account; Net Foreign Wealth; Permanent-Transitory Decomposition
JEL Codes: C32; E21; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transitory shocks (E32) | net foreign liabilities (F65) |
| transitory shocks (E32) | net output (D85) |
| transitory shocks (E32) | consumption (E21) |
| permanent shock (Y50) | net foreign liabilities (F65) |
| permanent shock (Y50) | net output (D85) |
| permanent shock (Y50) | consumption (E21) |
| net output (D85) | net foreign liabilities (F65) |
| consumption (E21) | net foreign liabilities (F65) |
| temporary output expansions (D57) | external surpluses (H62) |