Abstract

http://ssrn.com/abstract=315279
 
 

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Current Accounts in the Long and Short Run


Aart Kraay


World Bank - Development Research Group (DECRG)

Jaume Ventura


Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

June 2002

MIT Department of Economics Working Paper No. 02-21

Abstract:     
Faced with income fluctuations, countries smooth their consumption by raising savings when income is high, and vice versa. How much of these savings do countries invest at home and abroad? In other words, what are the effects of fluctuations in savings on domestic investment and the current account? In the long run, we find that countries invest the marginal unit of savings in domestic and foreign assets in the same proportions as in their initial portfolio, so that the latter is remarkably stable. In the short run, we find that countries invest the marginal unit of savings mostly in foreign assets, and only gradually do they rebalance their portfolio back to its original composition. This means that countries not only try to smooth consumption, but also domestic investment. To achieve this, they use foreign assets as a buffer stock.

Number of Pages in PDF File: 40

Keywords: Current account adjustment, short and long run, international capital flows

JEL Classification: F32, F41

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Date posted: June 7, 2002  

Suggested Citation

Kraay, Aart and Ventura, Jaume, Current Accounts in the Long and Short Run (June 2002). MIT Department of Economics Working Paper No. 02-21. Available at SSRN: http://ssrn.com/abstract=315279 or http://dx.doi.org/10.2139/ssrn.315279

Contact Information

Aart Kraay
World Bank - Development Research Group (DECRG) ( email )
1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-5756 (Phone)
202-522-3518 (Fax)
HOME PAGE: http://econ.worldbank.org/staff/akraay
Jaume Ventura (Contact Author)
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )
Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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