Current Accounts in the Long and the Short Run

Structural breaks and the twin deficits hypothesis

“…As a consequence of this behaviour, correlation between current account and investment should be negative for (net) debtor and positive for (net) creditor countries (see Section 4 in Kraay and Ventura 2002). We expect therefore the parameter β 2 to change its sign along with the net foreign assets of a country.…”

“…For instance, Normandin (1999), using a tractable version of Blanchard's (1985) model, shows that the degree of persistence of the budget deficit affects the strength of the twin deficits relation: a persistent pattern of the budget deficit implies that the representative consumer expects current public deficits to be followed by future deficits, hence by future tax reductions; this will lead the consumer to finance a current consumption increase through a current account deficit. Kraay and Ventura (2002), in a different setting, show that the relation between national savings shocks (such as those implied by a fiscal policy change) and current account behaviour is much stronger in the long than in the short run.…”

“…Finally, Kraay and Ventura (2002) show that in an intertemporal model with adjustment costs the representative agent, faced with transitory income shocks, utilizes foreign assets as a buffer stock. As a consequence of this behaviour, correlation between current account and investment should be negative for (net) debtor and positive for (net) creditor countries (see Section 4 in Kraay and Ventura 2002).…”

“…(6). We mentioned, among others, the presence of structural changes in private consumption behaviour (Makin 2004), changes in the net foreign position (Kraay and Ventura 2002), and more generally changes in the degree of financial integration. It should be stressed that these events are themselves intrinsically difficult to date: for instance, the graphs reported by Milesi-Ferretti and Lane (1999) show that the switch in the sign of the net foreign assets of a country may be located at quite distant dates, depending on the method used to construct the data.…”

Savings, the size of the net foreign asset position, and the dynamics of current accounts

“…The new rule would apply when the growth rates in the domestic and foreign economies are equal or when foreign holdings of domestic capital are negligible. The empirical evidence is found to be broadly consistent with both the new view and the new rule in the case of creditor countries, but 4 See also Kraay and Ventura (2003), and Ventura (2001Ventura ( , 2003. See Erauskin (2009) for the new rule in a two-country world.…”