Current Account Deficits During Heightened Risk: Menacing or Mitigating?

53 Pages Posted: 25 May 2017

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Ida Hjortsoe

Bank of England

Tsvetelina Nenova

London Business School - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2017

Abstract

Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country's vulnerability to periods of heightened risk. We develop a framework to evaluate such vulnerabilities and clarify which characteristics of a country's international investment portfolio determine whether a current account deficit is 'menacing' or 'mitigating'. Financial factors, namely international investment income and valuation changes on international investments, are critical. Our framework explores how domestic and global risk shocks affect these factors. An application to 10 OECD economies shows that a substantial degree of international risk sharing can occur through current accounts and international portfolios.

Suggested Citation

Forbes, Kristin J. and Hjortsoe, Ida Maria and Nenova, Tsvetelina, Current Account Deficits During Heightened Risk: Menacing or Mitigating? (May 2017). The Economic Journal, Vol. 127, Issue 601, pp. 571-623, 2017. Available at SSRN: https://ssrn.com/abstract=2973603 or http://dx.doi.org/10.1111/ecoj.12482

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

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Ida Maria Hjortsoe

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tsvetelina Nenova

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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