Current Accounts in Debtor and Creditor Countries
World Bank - Development Research Group (DECRG)
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
November 30, 1999
MIT Department of Economics Working Paper No. 97-12; World Bank Policy Research Working Paper No. 1825
What is the current account response to a transitory income shock? This model predicts that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries.
Kraay and Ventura reexamine a classic question in international economics: What is the current account response to a transitory income shock such as a temporary improvement in the terms of trade, a transfer from abroad, or unusually high production?
To answer this question, they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities.
Despite its conventional ingredients, the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries. Evidence from thirteen OECD countries broadly supports this theoretical prediction.
This paper - a product of the Macroeconomics and Growth Division, Development Research Group - is part of a larger effort in the group to study open-economy macroeconomics.
Number of Pages in PDF File: 46
JEL Classification: F41;F42;F40working papers series
Date posted: December 6, 2004
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