Current Accounts in Debtor and Creditor Countries

46 Pages Posted: 6 Dec 2004

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)

Date Written: November 30, 1999

Abstract

What is the current account response to a transitory income shock? This model predicts that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries.

Kraay and Ventura reexamine a classic question in international economics: What is the current account response to a transitory income shock such as a temporary improvement in the terms of trade, a transfer from abroad, or unusually high production?

To answer this question, they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities.

Despite its conventional ingredients, the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries. Evidence from thirteen OECD countries broadly supports this theoretical prediction.

This paper - a product of the Macroeconomics and Growth Division, Development Research Group - is part of a larger effort in the group to study open-economy macroeconomics.

JEL Classification: F41;F42;F40

Suggested Citation

Kraay, Aart and Ventura, Jaume, Current Accounts in Debtor and Creditor Countries (November 30, 1999). MIT Department of Economics Working Paper No. 97-12; World Bank Policy Research Working Paper No. 1825. Available at SSRN: https://ssrn.com/abstract=46882

Aart Kraay (Contact Author)

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

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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