Current Accounts, Net Foreign Assets and the Implications of Cyclical Factors

Bank of England Working Paper No. 173

29 Pages Posted: 23 May 2003

See all articles by Matthieu Bussière

Matthieu Bussière

Banque de France

Georgios E. Chortareas

University of Athens - Faculty of Economics; University of Essex - Department of Accounting, Finance & Management; King's College London

Rebecca L. Driver

affiliation not provided to SSRN

Date Written: January 2003

Abstract

Intertemporal models of the current account suggest that temporary income shocks are fully reflected in a country's net foreign asset position, so that agents invest abroad any savings generated by a positive income shock. On the other hand, a stylised fact in international economics is that there is a disproportionately large share of domestic assets in investors' portfolios. If investment risk is high and diminishing returns are weak, then savings from temporary income shocks may, in fact, be invested according to the existing portfolio composition. This implies that any bias in portfolios persists after a temporary shock. We estimate a model that explicitly allows for the possibility that the impact of initial portfolio allocation, proxied using net foreign assets, may differ, depending on whether shocks are permanent or temporary. Our results, from a panel of 18 OECD countries, suggest that initial portfolio allocation affects current account behaviour following temporary, but not permanent, shocks. These results are therefore compatible with the 'new rule'.

Keywords: Current accounts, initial portfolio allocation, net foreign assets, home-bias

JEL Classification: F41, F21, F32, E62, H3, E2, C23

Suggested Citation

Bussiere, Matthieu and Chortareas, Georgios and Driver, Rebecca L., Current Accounts, Net Foreign Assets and the Implications of Cyclical Factors (January 2003). Bank of England Working Paper No. 173. Available at SSRN: https://ssrn.com/abstract=392362 or http://dx.doi.org/10.2139/ssrn.392362

Matthieu Bussiere

Banque de France ( email )

Paris
France

Georgios Chortareas

University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+(30) 210 3689805 (Phone)
+(30) 210 3689810 (Fax)

University of Essex - Department of Accounting, Finance & Management ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Rebecca L. Driver (Contact Author)

affiliation not provided to SSRN

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