The Current Account as a Dynamic Portfolio Choice Problem

57 Pages Posted: 19 Mar 2009

Date Written: February 1, 2009


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. We 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, we find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.

Keywords: International Investment, Portfolio Choice, Current Account Balance

JEL Classification: F21, F32, G11

Suggested Citation

Didier, Tatiana and Lowenkron, Alexandre, The Current Account as a Dynamic Portfolio Choice Problem (February 1, 2009). World Bank Policy Research Working Paper No. 4861. Available at SSRN: or

Tatiana Didier (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
(202)458-1525 (Phone)

Alexandre Lowenkron

Banco BBM ( email )

Praca Pio X, 98
20091-040 Rio de Janeiro
United States

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