The Current Account as a Dynamic Portfolio Choice Problem

59 Pages Posted: 20 Apr 2016

Date Written: March 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. The authors 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, the authors find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.

Keywords: Debt Markets, Emerging Markets, Economic Theory & Research, Currencies and Exchange Rates, Investment and Investment Climate

Suggested Citation

Didier, Tatiana and Lowenkron, Alexandre, The Current Account as a Dynamic Portfolio Choice Problem (March 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN:

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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