Current Accounts in the Long and Short Run

40 Pages Posted: 7 Jun 2002  

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)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2002

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.

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

JEL Classification: F32, F41

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: https://ssrn.com/abstract=315279 or http://dx.doi.org/10.2139/ssrn.315279

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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