Current Accounts in the Long and Short Run

38 Pages Posted: 27 Jun 2002 Last revised: 28 Oct 2010

See all articles by Aart Kraay

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)

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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.

Suggested Citation

Kraay, Aart and Ventura, Jaume, Current Accounts in the Long and Short Run (June 2002). NBER Working Paper No. w9030. Available at SSRN: https://ssrn.com/abstract=317615

Aart Kraay

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
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202-473-5756 (Phone)
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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)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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