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Massachusetts Institute of Technology
Department of Economics
Working Paper Series
Current Accounts
in
the Long
and
Short Run
Aart Kraay
Jaume Ventura
Working Paper 02-21
June 2002
Room
E52-251
50 Memorial Drive
Cambridge, MA 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssrn.com/paper.taf7abstract id-=31
5279
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
JUN
1 3 2002
LIBRARIES
'
Massachusetts Institute of Technology
Department of Economics
Working Paper Series
Current Accounts
in
the Long
and
Short Run
Aart Kraay
Jaume Ventura
Working Paper 02-21
June 2002
Room
E52-251
50 Memorial Drive
Cambridge, MA 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssrn.com/paper.taf7abstract id-=xxxxx
Revised Draft
Current Accounts
in
the Long and Short
Run
Aart Kraay*
The World Bank
Jaume Ventura
MIT,
CEPR and NBER
June 2002
Faced with income fluctuations, countries smooth their consumption by
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
Abstract:
raising savings
assets
in
the
same
proportions as
stable. In the short run,
we
in their initial portfolio,
so that the
latter is
remarkably
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.
We
This paper has been prepared for the 2002 NBER Macroeconomics Annual.
are grateful to our
discussants Fabrizio Perri and Eric van Wincoop as well as to the participants for their useful comments.
The opinions expressed here are the authors', and do not necessarily reflect those of the World Bank, its
executive directors, or the countries they represent.
*
Countries are subject to transitory income shocks such as changes
is
of these
ample evidence
that countries
shocks on consumption,
The main
goal of this paper
raising savings
assets that countries use for this purpose.
allocate the marginal unit of savings
equivalently,
what are the effects
the current account?
The
their assets to buffer or
when income
is
smooth the
high and vice versa.
In particular,
we
ask:
how do
countries
between domestic and foreign assets? Or,
of fluctuations
in
savings on domestic investment and
view
is
that countries invest the marginal unit of savings
foreign assets. Underlying this view are the assumptions that investment risk
and diminishing returns are strong. The
first
the marginal unit of savings
its
is
invested
in
by the data. The top panel of Figure
in
fluctuations
in
in
the current account of roughly the
OECD
1
has been consistently rejected
shows pooled annual observations
countries over the past 30 years.
current account on savings delivers a slope coefficient that
is
savings
foreign assets, justifying the traditional rule
theoretically coherent, this rule
account and savings for 21
unit of
expected return below that of foreign assets. Hence
savings lead to fluctuations
same magnitude. While
than one. This
weak
those assets that offer the highest expected return. The second
domestic capital would lower
in
is
in
assumption ensures that countries invest
assumption implies that investing any fraction of the marginal
that fluctuations
1
2
traditional
their savings only in
effects
improve our understanding of the combination of
to
is
use
the terms
and many others.
of trade, fluctuations in production, policy reforms, natural disasters,
There
in
is
A
of the current
regression of the
positive but
much lower
nothing but the famous result of Feldstein and Horioka [1980] that
savings lead to parallel fluctuations
in
investment, with only minor effects
on the current account.
1
For evidence on consumption-smoothing, see Deaton [1991] who writes that "consumption is less volatile
than income, it fluctuates less about its trend, the amplitude of its business cycle variation is less, and the
variance of its growth rate is less than the variance of the growth rate of income" p. 133-34.
2
Why do countries use assets to smooth consumption rather than simply buy insurance abroad? Implicit in
this paragraph and basically in all that follows is the assumption that countries are unable or unwilling to
sell their idiosyncratic risk. This assumption is a central tenet of the intertemporal approach to the current
account (See Obstfeld and Rogoff [1995]), and it is widely thought to provide an accurate description of
In
unit of
expect
an
we proposed
earlier paper,
new view
a
that countries invest the marginal
savings as the average one (Kraay and Ventura [2000]). This
if,
in
contrast to the traditional view, investment risk
returns are weak.
The
what one should
is
strong and diminishing
is
assumption implies that countries are unwilling to change
first
the composition of their portfolios, unless shocks have large effects on the distribution
of asset returns.
is
The second assumption ensures
unaffected by the
way
marginal unit of savings
fluctuations
in
countries invest the marginal unit of savings. Hence, the
is
savings times the share of foreign assets
theoretically coherent, but
new
invested as the average one, leading to the
savings lead to fluctuations
The bottom panel
that the distribution of asset returns
it
of Figure
in
the current account that are equal to
the country portfolio. This rule not only
in
also provides a surprisingly
shows
1
rule that
good description
is
of the data.
that a simple regression of the current
account on
the interaction between savings and the share of foreign assets delivers a slope
coefficient close to
one and a zero
intercept.
Moreover,
explains around thirty percent of the observed variation
Hidden
predictive
point. In
the bottom panel of Figure
in
power
of the
the top panel,
new
rule in the long
we have
plotted the
1
there
is
this interaction
in
term by
the current account.
itself
3
a vast difference between the
and the short
run. Figure 2 illustrates this
average current account over a thirty-year
period against the average of savings time the share of foreign assets during the
period.
The new
rule explains
country differences
in
interaction of savings
country and year.
about 85 percent of the long run or average cross-
current accounts.
(demeaned) current account
for
and the
The new
same
In
the bottom panel,
we have
plotted the
each country and year against the (demeaned)
initial
share of foreign assets
rule explains basically
none
in
wealth for the
same
of the year-to-year within-
The question of why this is so is one of the most intriguing puzzles in international finance. See
Lewis [1999] for a survey of the literature on this topic.
3
Since foreign assets constitute a small fraction of observed country portfolios, this view implies that
fluctuations in savings should mostly lead to parallel fluctuations in investment, and is therefore consistent
with the Feldstein-Horioka finding. What we found most surprising about this view in our earlier paper is
that it has sharply different implications for the current account response to an increase in savings in
debtor and creditor countries. Since debtors by definition hold more than their wealth in domestic capital,
they invest at home more than the increase in savings, resulting in a current account deficit. In contrast,
creditor countries invest at home less than the increase in savings, resulting in a current account surplus.
reality.
country differences
in
The
current accounts.
contrast between the two panels indicates
a discrepancy between the long and the short run behavior of the current account.
Is
the short-run relationship between savings and the current account just noise
How do we
or are there clear patterns behind this cloud of points?
apparently haphazard behavior of the current account
behavior
clear
new
i.e.
in
the long run?
answers
rule
The main
to these questions.
embodies the view
changes
composition.
in
rule
in
in
The
this,
empirical success of the
the long run. This
in
the short run increases
in
To do
it
is
the short run with
account primarily
is
new
think,
is
in
reflects portfolio growth,
Our hypothesis
is
in its
2 simply
composition of country portfolios has been remarkably
shown
in
Figure
3.
If
we want to
understand why the new
we must
explain
savings lead mostly to portfolio rebalancing,
we must go
undone
neat
to provide
rule in the top panel of Figure
the composition of the country portfolio.
portfolio rebalancing is
in
further
If
in
addition
how and why
systematic
i.e.
we want to
and also explain why
reconcile
this short-run
the long run.
that the pattern of portfolio rebalancing
view that adjustment costs to investment are important.
If
is
consistent with the
this is the
case, an increase
savings that raises investment reduces the expected return to capital and induces
countries to rebalance their portfolios towards foreign assets.
the short-run current account surplus
Once savings
is
larger than the
Under these
conditions,
one predicted by the new
rule.
returns to normal, investment declines, adjustment costs disappear and
the country portfolio returns gradually to
its
original composition.
adjustment process, the current account surplus
4
we
its
useful to start by pointing out that the
the bottom panel of Figure 2,
the two panels of Figure 2,
in
reconcile the
the size of the country portfolio without systematic changes
performs so poorly
changes
in
contribution of this paper,
that the current
reflects the observation that the
stable
4
is
Throughout
this
smaller than the one predicted by
We also noted this discrepancy in our earlier paper, although it was much less pronounced in the smaller
sample of 13 countries and 23 years (1973-1995) that we used there. Here, we have been able to extend
our sample to 21 countries and up to 32 years per country (1966-1997). All the results obtained in the
previous paper are confirmed and, to some extent, reinforced when we use the larger sample.
the
new
portfolio
rule. In
and the new
With
patterns
rule
to
the long run, the shock does not affect the composition of the country
in
would
rule applies.
this theoretical picture at
we go back to the
hand,
new
the discrepancies between the observed current account and what the
predict.
When we do this,
the picture that
comes
out from the data turns out
be clear and unambiguous: on impact, countries rebalance
foreign assets
increases
data to search for
in
and the new
their portfolios
towards
rule systematically under-predicts the short-run effects of
savings on the current account.
In
the years that follow, countries
rebalance their portfolios back towards their original composition. During this period,
the
new
rule systematically over-predicts the current account.
adjustment process lasts about
five years. Overall, the
We find that the whole
evidence
is
consistent with the
view that adjustment costs to investment are important and, to avoid paying them,
countries use foreign assets as a buffer stock to smooth fluctuations
The theory presented here can
in
investment.
also reconcile two apparently contradictory
observations about the relationship between the current account and investment.
On
the one hand, the long run or cross-sectional correlation between investment and the
current account
is
weak
(Penati and Dooley [1984], Tesar [1991]).
On
the other hand,
the short run or time-series correlation between investment and the current account
consistently negative (Glick
and Rogoff
[1995]).
that in the long run, portfolio rebalancing
is
The theory presented here
We show that the data
cross-sectional correlation
countries.
The theory
is
is
predicts
small and the correlation between the
current account and investment should be positive
debtor ones.
is
in
creditor countries
and negative
consistent with this prediction and that the
in
weak
the result of pooling data from debtor and creditor
also predicts that
in
the short run portfolio rebalancing
is
important and this introduces a source of negative correlation between the current
account and investment. This
debtors or creditors.
We
is
true
in all
countries, regardless of
whether they are
present a simple decomposition of the cross-sectional and
time-series correlations between the current account and investment that illustrates this
point.
The paper
is
organized as follows: Section
I
presents a stylized model that
encapsulates the main elements of our portfolio-based theory of the current account.
Section
II
uses the model to study how countries react to income shocks. Section
examines the empirical evidence and
interprets
III
from the vantage point of the theory.
it
Section IV investigates the relationship between investment and the current account.
V concludes.
Section
I.
An
Intertemporal Model of the Current Account
In this
responds
section,
to transitory
we
present a stylized model of
how
the current account
income shocks. Since we stop short
equilibrium and focus instead
of modeling the world
on a small open economy, these shocks should be
interpreted as country-specific or idiosyncratic risk. Following the tradition of the
intertemporal approach,
we
simply
markets.
this risk in international
assume
In particular,
by assuming that the only asset that
The model captures what we
based theory
portfolio
that countries are unable or unwilling to sell
is
we
adopt the starkest form of
traded internationally
think are the essential
of the current account. This theory
is built
country plus
its
portfolio,
we
refer to the
sum
net foreign asset position.
of
The
all
5
elements of a
is
In
5
portfolio-
around the concept of country
relies
on
this
concept.
productive assets located within the
latter
consist of the
domestic assets held by foreigners minus the sum of
by domestic residents.
view
a non-contingent bond.
and a simple decomposition of the current account that
By the country
country
is
this
all
sum
of
all
claims on
claims on foreign assets held
our simple model, the only productive asset located within the
the stock of capital, and the net foreign asset position
is
simply the stock of
The intertemporal approach was developed by Sachs [1981, 1982], Obstfeld [1982], Dornbusch [1983],
Svensson and Razin [1983], Persson and Svensson [1985], and Matsuyama [1987], among others.
Obstfeld and Rogoff [1995] survey this research.
non-contingent bonds
portfolio,
we
owned by
refer to the
share of the net foreign asset position
evolution of the current account
changes
pieces:
changes
in
is
it
useful to break
is
to
good
is
is p.
required. Since capital
its
return
is
growth; and
call portfolio
constants; and
is
To produce one
reversible
co is
one
6
normally distributed with instantaneous
1
rik
k
dt
«=*-—
is
assumed
to
unit of capital
unit
its
a Wiener processes,
mean n and
be proportional
i.e. its
;
where n and
changes are
the flow of production
is,
instantaneous variance
to the
o.
is
The
aggregate investment
rate:
(teo)
this is also the
previous period. Note that
we
stock of capital that
was used
justifies this relationship
in
production
in
the
are treating the relationship between operating costs and
investment as a congestion effect or negative externality.
One
set of assumptions that
would be that investment requires a public input that costs
per unit of investment and the government finances this input by raising a tax
6
one
the aggregate stock of capital at the beginning of the period. Since capital
does not depreciate,
capital.
The
and does not depreciate,
2
operating costs, a, are
capital.
unit of capital is 7idt+0-dco
normally distributed with E[dco]=0 and E[dco ]=dt. That
k
two components or
equal to the flow of production minus operating
flow of production generated by
a are non-negative
where
interpret the
two investment opportunities: foreign loans and domestic
equal to one and
The
(1)
we
To
a single good that can be used for consumption and investment. Consumers
of the single
costs.
into
it.
small country populated by a continuum of identical consumers.
instantaneous interest rate on foreign loans
is
down
in
the composition of the country portfolio, or portfolio rebalancing.
have access
price
it
the size of the country portfolio, which
in
We study a
There
the country. By the composition of the country
A.
a on
There might be alternative and more compelling sets of assumptions that
Implicit in this decomposition is the assumption that asset price revaluations are small. This might be a
poor assumption in some episodes. See Ventura [2001] for an example that shows this.
deliver this relationship.
tractable
and
effective
The reason we adopt
way
it
here
to capture the notion of
is
simply because
it
provides a
adjustment costs to investment.
The representative consumer values consumption sequences
7
with these
preferences:
EJlnce"
(2)
5
'
dt
(6>0)
Given our assumptions about the flow of production and the operating costs,
the return to capital
is
(Tt-a)dt + adco; and the representative consumer's budget
constraint can be written as follows:
da = [((n-a)-(1-x) + px)a-c]-dt + (1-x)-a-a-dco
(3)
where
c,
a and x denote consumption, wealth and the share of foreign loans
portfolio of the representative
consumer. The budget constraint
risk-return trade-off underlying investment decisions.
in
Each
illustrates the
the
standard
extra unit of wealth invested
domestic capital rather than foreign loans increases the expected return to wealth by
n-a, at the cost of raising the variance of this return by
not possible to short-sell the capital stock,
Solving the representative
and
(4)
7
in
portfolio decisions:
i.e.
a2
.
Finally,
we assume
that
it
is
x<1
consumer problem, we
find the optimal
consumption
8
c = 5 a
•
The q-theory postulates that investment raises the price of investment goods relative to consumption
goods, leaving the productivity of capital constant. We instead postulate that investment lowers the
productivity of capital, leaving the relative price of investment and consumption goods constant. It is likely
that in real economies, both sorts of adjustment costs to investment are important. See Lucas [1967] for an
early model that considers both types of adjustment costs; and Caballero [1997] and Dixit and Pyndick
[1994] for two excellent expositions of existing models of adjustment costs of investment.
Merton [1971] solved this problem first. See also the appendix in Kraay and Ventura [2000].
x = 1-max<{
(5)
When
deciding their consumption, consumers behave as
income theory
wealth and
When
is
r~^'°
of
Friedman. Equation
(4)
shows
that
Markowitz and Tobin. Equation
shows
(5)
depend only on the mean and variance
wealth.
The
In
kink
in
the
on domestic
constraint
consumption
independent of the expected return and
deciding their portfolio, consumers behave as
demand
capital,
equilibrium, the
that the
in
volatility of
the permanent-
is
a fixed fraction of
available assets.
the mean-variance theory of
in
shares of each asset
of the different assets
in
the portfolio
and not on the
level of
for foreign assets is the result of the short-sale
x<1.
i.e.
demand and supply
of capital
must be equal and
this implies
that:
(1-x)a =
(6)
The
assumed
left
k + dk
hand side
that only
of Equation (6)
The
right
the
demand
domestic consumers hold domestic
the share of their wealth that these
wealth.
is
hand side
consumers want
of Equation (6)
is
for capital.
capital, this
to hold in
Since
we have
demand
domestic
is
equal to
capital,
times
the supply of capital, and consists of the
capital stock at the beginning of the period plus the investment
made
during the period.
This completes the description of the model. There are two state variables: k
and
a;
limiting
and one shock:
case
in
which
dco.
X—>0.
and the only state variable
parameter
restriction
The "new
In this
is
rule"
model of our previous paper obtains as the
case, there are no adjustment costs to investment
the level of wealth.
ensures that the economy
10
Assume
is
that 7i>p+A.(p-5). This
productive enough so that the short-
on
selling constraint
Equations
capital
(1)-(6) to obtain the
dk
=x-
(7)
1
ji-p-a
-
2
•
da
T
a
straightforward to use
and wealth:
for the capital stock
9
2
+ p-8
dt
+ — -adco
a
a
Equations
II.
is
ay
(8)
study
dynamics
it
—k^ •dt
k
condition
never binding. Then,
is
a
(7)-(8) provide the
and sequence
how the
Our next goal
is
to
use
this
dynamical system
Growth and
Portfolio
the model's implications,
illustrate
first
to
we
Rebalancing
analyze the behavior of savings,
investment and the current account after a transitory income shock. To do
useful
initial
current account responds to income shocks.
Portfolio
To
of shocks.
law of motion of the system from any given
to establish
some
notation. Let
account both as a share of wealth,
i.e.
along any particular sample path that
S and CA be savings and the
S=
we
1
da
a
dt
and
CA =
1
dfx -a)
a
dt
.
this,
it
is
current
It
follows that,
consider, the current account can be written
as follows:
(9)
CA
= x-S +
—
dx
dt
Equation
of
(9)
two terms. The
To derive Equations
shows
first
that
it
is
possible to interpret the current account as the
one measures the change
(7)-(8),
remember
in
the stock of foreign assets that
that in the limit of continuous time
11
dkdt=0.
sum
would keep constant the composition of the country
to
and
as portfolio growth. The second term measures the change
country portfolio and this
To develop
current account,
following
'
is
what we
intuitions
we
refer to
as
in
this is
what we
refer
the composition of the
portfolio rebalancing.
about the interplay between these two components of the
present next a series of examples.
sample path
^
(10)
v
portfolio
In all
we assume the
of them,
for the production shock:
tel-co,^)
e-o
-1
tefTpT;,)
(e>0)
dt
te[T2 ,oo)
That
is,
the country experiences a sequence of unexpected production shocks
equal to edt times the capital stock for a
finite
period and zero afterwards.
We
refer to
the period [TLT2) as the shock period and to (-^.T^ and [T 2 ,°°) as the pre- and post-
shock periods, respectively.
Figure 4 shows the behavior of the foreign asset position along this sample
path. Regardless of the
initial
condition, during the pre-shock period the share of
foreign assets converges towards x*
=
1
+
f
1
\
2-X
simulation behind Figure 4
assumes
i
1
A
+
X
1
(n
v
- p) - K
p+5
\{2-X
that this value has
7
.
The
a
been reached by
t=0. During
the shock period the share of foreign assets increases steadily, albeit at a declining
rate.
The magnitude
of this increase
effects of increased investment
inducement
for investors to
depends on
X.
High values of X imply that the
on operating costs are large and provide a strong
rebalance their portfolios towards foreign assets. During
the post-shock period, investment and operating costs decline.
foreign assets slowly returns to
this
its
pre-shock
level.
We
As a
the share of
next study the implications of
behavior of the share of foreign assets for the current account.
12
result,
Consider
i.e.
A—>0.
first
Figure 4
throughout.
As
the case
shows
which adjustment costs to investment are
in
that in this
a result, there
is
case the share of foreign assets
portfolio rebalancing,
—=
i.e.
constant
is
dx
no
negligible,
and the current
;
dt
account
is
analyzed
equal to portfolio growth;
in
our previous paper, and
are depicted
in
Figure
5.
i.e.
CA
= x S This
•
the "new rule" model that
implications for a creditor
its
The top panel shows
bottom panel shows a debtor country,
is
.
i.e.
a creditor country,
we
and a debtor country
i.e.
x*>0, while the
x*<1. Both countries raise their savings
during the shock period as a result of the standard "consumption-smoothing" motive.
Both countries also invest these marginal savings
in
same
the
small
the
and
In
same
we
find that in both countries the increase in
order of magnitude as the increase
in
saving. But
account responses
this leads to different current
the creditor country investment increases
current account registers a surplus.
somewhat more than savings and
main
domestic capital and foreign loans
proportions as their average portfolio. Since the foreign asset share
absolute value,
in
in
In
in
somewhat
it
is
investment
is
of
not exactly the same,
debtor and creditor countries.
less than savings
and the
the debtor country investment increases
the current account registers a
deficit.
This
is
the
result of our previous paper.
Consider next the case
negligible,
creditor.
i.e.
in
which adjustment costs to investment are no longer
X>0. Figure 6 shows the case of a country that
By choosing the case x*=0, we know
that in the
is
neither a debtor nor a
absence
of adjustment costs,
the current account would be zero before, during and after the shock. Figure 6
the behavior of savings, investment and the current account
raises
its
savings during the shock period for the
motive as before. But adjustment costs
and
is
this affects
how these savings
in this
case.
shows
The country
same "consumption-smoothing"
now discourage
large swings
in
investment,
are distributed between domestic capital and
foreign loans.
During the shock period, the country uses most of
its
increase
in
savings to
purchase foreign loans, while investment increases only gradually. Consumers
13
rebalance their portfolios towards foreign assets because the increase
raises operating costs
portfolio-rebalancing
new
and
productivity
component
of the current account
account surplus
in
is
positive and, as a result, the
the short run.
In
the post-shock
but remains higher than normal for a while. Since
falls slowly,
has returned to
investment
lowers the expected return to domestic capital. The
this
rule under-predicts the current
period investment
in
pre-shock
its
higher-than-normal investment
is
savings return to normal and the
level,
now financed by
a sale of foreign loans. Consumers
rebalance their portfolios back towards their original composition because the decline
in
investment lowers operating costs and
The
capital.
portfolio-rebalancing
negative and, as a result, the
medium
run.
and the new
component
new
again
in
the expected return to domestic
of the current account
rule over-predicts the current
As time passes, the country
rule applies
this raises
portfolio returns to
its
is
therefore
account surplus
original
in
the
composition
the long run.
This example clearly shows the role of foreign loans as a buffer stock to smooth
the fluctuations
in
investment. Without access to foreign loans, countries would be
forced not only to invest
all
of their savings at
home
but also to do so
contemporaneously. Access to foreign loans permits countries a to spread
domestic investment over time and,
do
way, avoid paying high adjustment costs. To
countries temporarily place their savings
this,
them
in this
into
It
in
in
and slowly convert
foreign loans
domestic investment.
is
possible to design
more complicated examples
exhibits richer dynamics. For instance, Figure 7
costs
their
a creditor and a debtor country.
in
which the current account
shows the case
One can
interpret
of positive adjustment
these examples as a
combination of portfolio growth and portfolio rebalancing along the lines of the
explanations of Figures 5 and 6.
The theory developed here
clear picture of the factors that determine
in
savings.
The
next step
is
to
go back
how
the current account reacts to increases
to actual data
vantage point of the theory.
14
therefore equips us with a
and attempt
to interpret
it
from the
III.
The Process
In
the introduction,
current accounts
run, current
in
OECD
of Current
Account Adjustment
we argued
the long run most of the variation
countries
that
is
due
account fluctuations primarily
We
portfolios or portfolio rebalancing.
in
to portfolio
reflect
made
growth
changes
this point
in
current account. However, the
same
effects, while in the short
the composition of country
based on the observation
the simple interaction of a country's foreign asset share with
the past thirty years, proved to be a very
good predictor
its
in
that
saving, averaged over
average
of the country's
be a very
interaction using annual data proved to
poor predictor of year-to-year fluctuations
in
current accounts. This
was shown
in
the
10
two panels of Figure
2.
The theory presented above has the
potential to explain these observations. In
the presence of adjustment costs to investment, the theory predicts that
in
the short-
run countries react to transitory income shocks by raising savings and rebalancing their
portfolios
towards foreign assets.
therefore explain
why the
short run variation
and not
portfolio rebalancing,
these costs are sufficiently strong, the theory can
If
in
portfolio growth.
the current account
The theory
is
dominated by
also predicts that
in
the
aftermath of the shock countries gradually rebalance their portfolios back to their
original composition.
in
the current account
The theory
rebalancing that
10
Therefore the theory can also explain why the long-run variation
is
dominated by
portfolio growth,
and not
portfolio rebalancing.
also has very clear predictions for the patterns of portfolio
we
should observe
Of course, one could argue that
in
the data.
The new
rule or portfolio
growth
simply due to
growth
than in the between-country variation. While measurement error is certainly present, we clearly do not
think it is the whole story. One way to see this is to notice that (i) measurement error in the RHS variable
in our regression will bias the slope coefficient downward by a factor equal to the signal-to-noise ratio, and
2
(ii) measurement error in both the LHS and RHS variables will bias the R
coefficient by a factor equal to
the product of the signal-to-noise ratios in the two variables. Since we observe a slope coefficient of one2
half and an R coefficient that falls from 0.6 in the "between" regression to 0.03 in the within regression,
this implies a signal to noise ratio of only 0.5 in the RHS variable and 0.1 in the LHS variable. While there
much
greater
measurement
are clearly various
this
discrepancy
in
the "between" and "within" results
error in the within-country variation in current accounts
measurement issues
in
our data,
we find
calculation would suggest.
15
it
and
implausible that the data
is
portfolio
is
as noisy as
this
component
of the current account under-predicts the actual current account during the
shock period as countries rebalance
new
back towards
increase
its
original composition. In other
of the current account, while past increases
associated with negative values
in
their
words, a contemporaneous
savings should be associated with a positive portfolio-rebalancing
in
component
apply
towards foreign assets, while the
account after the shock as countries rebalance
rule over-predicts the current
portfolios
their portfolios
in
savings should be
in
same component. Moreover,
the
for the
new
rule to
the long run, these positive and negative components should be roughly of the
same magnitude.
In this
section,
we show that
the data
is
consistent with these
predictions.
We begin
by decomposing observed current accounts
portfolio rebalancing
assets
in
components. As
in
the theory,
let Xct
into portfolio
growth and
denote the share of foreign
the portfolio of country c at the beginning of period
and
t,
let
S and CAc
ct
denote gross national saving and the current account balance as a fraction of
during period
PG
= x ct S ct
•
ct
period
in
the
We
t.
a country were to distribute
t if
same
proportion as
measure the
difference
ct
its
ct
-S ct
its
saving between domestic and foreign assets
component
We
of the current account residually as the
this
decomposition,
and the share of foreign assets
in
current
Financial Statistics.
US
dollars
in
in
we
require data on current accounts, saving
country portfolios.
We obtain
We measure gross national saving
current
US
annual data on current
from the International Monetary Fund's International
account and gross domestic investment
GDP
i.e.
.
To implement
in
current
dollars, obtaining
Bank's World Development Indicators.
in
of the current account as
between the actual current account and the portfolio-growth component,
ct
fraction of
component
existing portfolio at the beginning of the period.
portfolio-rebalancing
PR =CA -x
accounts
portfolio-growth
GDP
the net purchases of foreign assets that would be observed during
i.e.
,
measure the
t
US
dollars,
of the current
and express both as a
investment and
We obtain
GDP from
the World
data on the share of foreign assets
wealth from Kraay, Loayza, Serven and Ventura (2000).
16
sum
as the
We restrict attention to the
set of 21 industrial countries for which at least
20 annual observations on
this variable
are available over the period 1966-1997 covered by this dataset.
With data on saving and the portfolio-rebalancing component of the current
account
hand,
in
we
estimate a series of dynamic linear regressions of the form:
p
PR d =a c
(11)
q
+£<|> w -PR Cit _ v
where PRc and S ct are the
t
portfolio-rebalancing
saving as described above; Zc
We then
Ci ,_ v
+P c Z +u
t
is
component
period
—
3S
i.e.
of the current account
use the point estimates of the coefficients
dPR c
t,
ct
a vector of control variables, and Ud
impulse response function of portfolio rebalancing
in
ct
v=0
v=1
error term.
/
+£Ycv-S
•
,
in
is
and
a well-behaved
to retrieve the implied
period t+k to an increase
in
saving
l
:
.
These impulse responses provide us
with a picture of
how
ct
countries
The
change the composition
results of four
Table
1
of their portfolios following
such regressions are summarized
in
an increase
Table
1.
in
saving.
The top panel
of
reports the estimated coefficients, while the bottom panel reports the
corresponding impulse response functions using the 21 -country sample of annual
The estimated impulse response
observations.
panels of Figure
We begin
countries.
saving.
In this
11
In
in
the four
8.
by assuming that
all
of the slope coefficients are the
our simplest specification,
The
functions are also plotted
we
same
across
also set p=0 and introduce 5 lags of
results of this specification are reported
in
the
first
column
of Table
1.
case, the impulse response function simply consists of the estimated coefficients
on current and lagged saving.
We find
a strong positive contemporaneous correlation
between saving and the current account. The point estimate of 0.6 can be interpreted
as the fraction of an increase
in
saving that, on impact, would be invested
17
in
foreign
assets by a country with zero
higher (lower)
Since the
in
latter
initial
foreign assets. This fraction would
creditor (debtor) countries
creditor countries
and negative
The subsequent
decreasing
in
in
an increase
in
slightly
of the portfolio-growth
measures the current account balance
of their portfolios constant following
in
because
be
that
saving,
component.
would keep the composition
it
is
by construction positive
debtor ones.
lags of saving
enter with negative coefficients that are
all
absolute value and, with the exception of the
first lag,
are not significantly
from zero. These coefficients can be interpreted as the fraction of the
different
increase
saving that
in
subsequent
0.09 which
is
five years.
is
reallocated back towards domestic assets
Interestingly, the
insignificantly different
toward foreign assets
largely
is
readjustment occurring
the
in
of the coefficients
in
of the
on lagged saving
from zero. This suggests that the
undone
first
sum
each
in
initial
is
-
initial shift
the next five years, with the bulk of the
year following the increase
in
saving. This pattern
is
consistent with the predictions of the theory.
The
We
rest of
Table
1
reports a variety of robustness checks on this basic result.
begin by introducing lagged values of the portfolio-rebalancing component of the
current account, and find that the
third
(and higher) lags are not.
coefficients
function
that the
is
In
most
and second lags are strongly
Although
on current and lagged saving,
very similar to that reported
initial shift
the increase
11
12
first
in
in
toward foreign assets
significant, while
this slightly alters the point
we
the
find that the
first
shape
of impulse
The main
regression.
is slightly
estimates of the
response
difference
is
smaller than before, at 50 percent of
saving.
we find that fifth and higher lags of saving are insignificantly different from zero in
and adding higher lags has little effect on the point estimates of the coefficients on the
unreported results,
specifications,
first five
12
lags.
We are assuming
here that the time dimension of our panel
is
sufficiently large that
consistent estimates of the coefficients on the lagged dependent variable
in
we can
obtain
the presence of fixed effects
on large-T asymptotics. Remember also that saving is constructed as investment plus the current
account, and the latter is highly correlated with the dependent variable in Equation (11). To the extent that
the portfolio-rebalancing component of the current account is measured with errors that are persistent over
time, this could introduce a correlation between the residuals and current and lagged saving. In the
specifications with lags of the dependent variable, we test for and do not reject the null of no serial
dependence in the residuals, and so we can rule out this potential source of bias in our estimated impulse
responses.
relying
18
In
the next column
we augment the
To
several additional control variables.
that
change the desired composition
are correlated with saving, this
will
in all
of country portfolios,
bias our results
increases. Similarly,
if
if
in
initial shift
in
and
these
to the extent that
depend on the
directions which
there are global shocks which raise saving
countries (such as changes
underestimating the size of the
column with
the extent that there are other shocks to returns
signs of these correlations. For example,
and investment
specification of the previous
in
world interest rates),
we
be
will
toward foreign assets when saving
countries and years
in
which saving
is
high, factors that
increase the desired rate of investment (such as population or productivity growth),
may
again be underestimating the
we
factors,
introduce year
dummies
Solow residuals as a proxy
reports the results of this
shift
toward foreign assets. To control for these
to capture global shocks, population growth,
for productivity growth.
augmented
13
The
third
column
regression. Population growth
residuals enter significantly with the expected negative signs, and
toward foreign assets than before, with 75 percent of the
allocated toward foreign assets.
same as
before, with the
initial
of Table
and
1
and Solow
we find
increase
a larger shift
saving
in
However, the subsequent pattern of adjustment
initial shift
we
toward foreign assets being reversed
in
is
the
next few
years.
In
the final column,
Equation (11) are the
we
relax the assumption that the slope coefficients
same across
countries,
separately for each country. Because of the
country,
we
equation
short time-series available for each
of saving, as well as population growth
We report the average and
13
fairly
this
adopt a more parsimonious lag structure, introducing only two lags of the
dependent variable and
coefficients
and instead estimate
in
in
and Solow
residuals.
standard deviation across countries of the estimated
the last column of Table
We construct Solow residuals as the growth
the period average share of labour
Statistics and National Accounts.
in
14
1.
in
Not surprisingly,
GDP
GDP, drawing
at
we
find that the country-
constant prices less growth
the latter two variables from the
in
employment times
OECD
Labour Force
In the presence of parameter heterogeneity across countries, the pooled estimates reported in the
previous two columns will not deliver consistent estimates of average (across countries) of these
parameters when there is a lagged dependent variable (Pesaran and Smith (1995)). However, the
average across countries of the estimated coefficients will provide a consistent estimate of the average
19
by-country parameters are
countries
in
qualitatively
much
the point estimates
is
large.
and quantitatively quite
average, the fraction of an increase
and
this initial shift
in
our sample,
current account, investment
we were
International Financial Statistics
countries,
we
in
saving that
is
to construct quarterly portfolio
is
quickly
of saving
On
allocated to foreign assets
undone
in
0.7,
is
subsequent periods.
relied
so far
is
that
it
is
not
and the current account. For 12
of
able to obtain quarterly observations on the
GDP
beginning
and the
linearly interpolate the
find results that are
on which we have
dynamics
and
we
similar to those in the previous columns.
of the annual data
informative about the intra-year
the countries
Nevertheless,
toward foreign assets
One drawback
and the dispersion across
less precisely estimated,
OECD
in
1980 or
earlier
from the
Quarterly National Accounts. For these
annual data on the foreign asset share and use
growth and rebalancing components.
We then
it
re-
estimate Equation (11) using quarterly data, introducing eight lags of the portfolio
rebalancing component of the current account, and eight lags of saving.
have quarterly data on population or employment growth required
same
control variables
and 4
in
Table
as
in
to introduce the
the previous regressions with annual data (Regressions 3
We therefore
1).
We do not
include only a set of period
dummies and
real
GDP
growth as controls.
As
before,
by computing the
we summarize
the results of these country-by-country regressions
mean and standard
deviation across countries of the estimated
we
impulse responses. As shown
in
the top panel of Figure 9,
over 60 percent of an increase
in
saving that lasts one quarter
Beginning immediately
to
in
the next quarter, this
initial shift
be reversed as countries run current account
deficits.
saving that lasts four quarters, the pattern that emerges
in
the annual data. This
is
shown
in
find that
is
on impact,
invested abroad.
toward foreign assets begins
If
is
we
consider a shock to
very similar to that
find results that are quantitatively quite similar
in
we saw
the bottom panel of Figure 9. During the shock
period, countries run positive but declining current account surpluses as they
response. We
source of bias
just
across
all
specifications despite this potential
the estimates which impose parameter homogeneity across countries.
20
use
foreign assets as a buffer stock to
run current account deficits
To sum
smooth investment.
up, while portfolio growth explains
we
in
On
of the long-run variation
the short run.
component
In all of
in
in
our
of the current
account
impact, up to three-quarters of a shock to saving
invested abroad as countries use foreign assets as a buffer stock to
investment
in
much
find that the portfolio-rebalancing
follows a remarkably clear pattern.
is
subsequent years, countries
order to restore their original pre-shock portfolios.
in
current accounts, portfolio rebalancing dominates
specifications,
In
the face of adjustment costs.
In
subsequent periods, the
saving produces current account deficits as countries
smooth
initial
increase
back to
shift their portfolios
their original composition.
IV.
The Current Account and Investment
Over the past 20 years considerable empirical
effort
has been devoted to
documenting the correlations between investment and the current account.
stylized facts
have emerged.
the current account are
weak
First,
Two
cross-country correlations between investment and
(Penati and Dooley [1984], Tesar [1991]). Second, within
countries the time-series correlation between investment and the current account
consistently negative (Glick
facts hold
in
and Rogoff
our sample of countries
in
We document that these two stylized
[1995]).
Figure 10.
averages of the current account as a fraction of
In
GDP
the top panel
we
plot long-run
(on the vertical axis) against long-
run investment rates (on the horizontal axis) for the 21 industrial countries
sample. Across countries,
we
find a very
weak negative
with a coefficient of -0.036. In the bottom panel,
we
correlation
plot the
expressed as deviations from country means, pooling
21
is
all
in
our
between the two,
same two
variables
available annual
observations. Within countries, the correlation between investment and the current
account
strongly negative, with a coefficient of -0.329.
is
15
This difference between the correlations between the current account and
investment
proposed
the long and short run are consistent with the view of the current account
in
in this
paper.
To see
this,
it
is
useful to write the current account
and
investment as follows:
(12)
(13)
CA =x
ct
l
ct
-S ct
ct
+PR
ct
=(1-x el )-S et -PR
el
These equations decompose the current account and investment
portfolio-growth
into their
and portfolio-rebalancing components. The key observation
the pattern of correlations between the current account and investment
run relationship between these variables
is
dominated by
components, while the short-run relationship
components. To make
that the long-
their portfolio-growth
dominated by the portfolio-rebalancing
is
statement precise,
this
is
to explain
we decompose
the coefficient of a
regression of the current account on investment into the contributions of portfolio
growth and portfolio rebalancing. Let p be
PG
regression coefficient and define
_ Cov(xS,(1-x)l) gnd PR _ Cov(CA,l)
P
interpret
PG
(3
and
Cov(x-S,(1-x)l)
Var(l)
Var(l)
Var(l)
we
this
PR
(3
as the contributions of
portfolio
'
growth and
Sjnce P
b=3P
pg
+b
P
pr
'
portfolio
rebalancing to the relationship between the current account and investment.
When we
of Figure 10,
perform
we find
that
this
PG
(3
portfolio rebalancing plays
decomposition on the between estimator
=-0.041 and
no
PR
(3
in
the top panel
=0.005. Consistent with the theory,
role in the long run
and the
relationship
between the
current account and investment reflects only portfolio growth. Moreover, the theory
predicts that the correlation
This is almost exactly the
Rogoff [1995],
between the current account and investment should be
same as
the average of country-by-country estimates reported
22
in
Glick
and
negative
The
in
debtor countries (where x>1) and positive
intuition is
increases
account
in
in
simple and follows immediately from the
saving generate even greater increases
while
deficits,
of saving, leading to current
of a mixture of 15 debtor
new
rule:
in
debtor countries
investment, leading to current
in
creditor countries the increase
in
creditor countries (where x<1).
in
investment
is
less than that
account surpluses. Since our sample of countries consists
and 6 creditor countries, we should expect
to find a negative
but not especially strong correlation between investment and the current account
cross-section that pools
panel of Figure 10. But
compute the
all
countries together. This
when we
correlations separately
correlation
among
that this
the case. Of course,
is
divide our
we
When we
what we found
in
a
the top
debtors and creditors and
we
should find a negative
among
creditors. Figure
1 1
shows
only a very small sample of creditors and
slopes should be taken with a grain of
salt.
note that they are consistent with the theory.
perform the
bottom panel of Figure 10,
of negative correlation
same decomposition on
we
theory, portfolio rebalancing
is
find that
many
PG
(3
important
in
the within estimator
=-0.014 and p
PR
in
is
the
the short run and this introduces a source
In
the presence of
a given period triggers an adjustment process
periods. In particular, a positive shock to
contemporaneously and
in
=-0.315. Consistent with the
between the current account and investment.
adjustment costs, a shock to income
that lasts for
the two groups,
we have
in
exactly
into
debtors and a positive correlation
debtors, and so these differences
Nevertheless,
in
sample
is
in
income raises saving
followed by several periods of portfolio rebalancing, as
countries have higher than normal investment financed by current account deficits
order to restore their pre-shock portfolios.
The opposite occurs when there
is
in
a
negative shock. Thus positive shocks trigger a "ripple" effect of subsequent higher
investment and lower current accounts, and vice versa for negative shocks. This
"ripple" effect is
a source of negative correlation between investment and the current
account within countries.
23
Remarks
V. Concluding
By
cyclical
that
we
reconciling long
and short run data,
this
behavior of savings, investment and the current account
first
proposed
in
in industrial
when income
the short run, countries invest most of their savings
in
is
high and vice versa.
foreign assets, only to
rebalance their portfolios back to their original composition
in
the next four to five
years. In the long run, country portfolios are remarkably stable, the
and fluctuations
in
countries
Kraay and Ventura [2000]. Faced with income shocks,
countries smooth consumption by raising savings
In
paper completes the view of the
savings lead' to fluctuations
savings times the share of foreign assets
in
in
new
rule applies
the current account that are equal to
the country portfolio.
assets as a buffer stock, countries smooth investment
in
By using foreign
order to save on adjustment
costs.
An
interesting implication of this view of international capital flows
stock of foreign assets and the current account are
investment and domestic capital stock. But
this
more
volatile
does not mean
To
purchase and
that international capital
the contrary, the view presented here suggests that the
sell
foreign assets allows countries not only to
consumption, but also
their investment. Foreign assets
part of the volatility of these other
smooth
more
volatile
ability to
their
and the current account absorb
macroeconomic aggregates.
24
that the
than consumption,
flows are a factor that contributes to making macroeconomic aggregates
or unstable.
is
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(1
Is
There a Laursen-
982), 251-270.
Obstfeld Maurice, and Kenneth Rogoff, "The Intertemporal Approach to the Current
Account."
In
International
Gene Grossman and Kenneth Rogoff, eds., Handbook of
Economics. Amsterdam, The Netherlands: Elsevier, 1995.
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Penati, A.
and M. Dooley, 1984. Current account imbalances and
1949-81, IMF Staff Papers 31, 1-24.
capital formation in
industrial countries,
Persson, Thorsten, and Lars Svensson, "Current Account Dynamics and the Terms of
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Economy, XCIII (1985), 43-65.
Hashem and Ron Smith, (1995). "Estimating Long-run Relationships from
Dynamic Heterogenous Panels". Journal of Econometrics. 68 (1995) 79-113.
Pesaran,
Sachs, Jeffrey, "The Current Account and Macroeconomic Adjustment
Brookings Papers on Economic Activity, 1 (1981), 201-268.
,
in
the 1970s,"
"The Current Account in the Macroeconomic Adjustment Process,"
Scandinavian Journal of Economics, LXXXIV (1982), 147-159.
.
Svensson, Lars, and Assaf Razin, "The Terms of Trade and the Current Account: The
Harberger-Laursen-Metzler Effect," Journal of Political Economy, XCI (1983),
97-125.
Tesar, Linda, "Savings, Investment and International Capital Flows," Journal of
International Economics, XXXI (1991), 55-78.
Ventura, Jaume, "A Portfolio View of the U.S. Current Account Deficits". Brookings
Papers on Economic
Activity.
(2001), July.
26
Tabid:
Portfolio Rebalancing
and Saving
(An nual Data for 21 Countries)
Reqression
Coef
1
S.E
Rearession 2
Coef
S.E
Reqression 3
Coef
S.E
Reqression 4
Mean
SDof
Coef
Coefs
Coefficient Estimates
0.598
0.096
0.504
0.080
0.746
0.079
0.691
0.286
sy(-1)
-0.281
0.133
-0.611
0.102
-0.824
0.104
-0.767
sy(-2)
-0.120
0.106
0.070
0.123
0.383
0.167
-0.120
sy(-4)
-0.102
0.095
0.103
sy(-5)
-0.060
0.078
0.077
0.073
0.065
0.058
0.109
sy(-3)
0.112
-0.043
sy
-0.031
0.020
0.040
0.067
-0.063
0.061
0.019
0.057
0.056
0.845
0.057
0.837
0.216
pr(-2)
0.754
-0.114
0.069
-0.081
-0.152
0.186
pr(-3)
-0.031
0.049
-0.076
0.066
0.047
0.050
0.188
-0.390
0.198
-0.267
1.293
pr(-1)
dq
dpop
*
-0.375
-0.684
Y
Y
N
Country Effects
Year Effects
Y
Y
N
Impulse Responses
0.054
0.746
0.059
0.691
0.286
-0.281
0.096
0.133
0.504
t-1
-0.231
0.096
-0.193
0.095
-0.179
0.222
t-2
-0.120
0.106
-0.119
0.058
-0.114
0.056
-0.111
0.142
t-3
-0.120
-0.122
0.060
-0.098
0.054
-0.088
0.106
t-4
-0.102
0.095
0.103
-0.102
0.042
-0.122
0.047
-0.059
0.076
t-5
-0.060
0.078
-0.039
0.028
-0.068
0.040
-0.038
t-6
-0.014
0.024
-0.040
0.037
-0.024
t
0.598
t-7
-0.003
0.020
-0.019
0.035
-0.018
0.063
0.057
0.048
t-8
0.000
0.016
-0.008
0.033
-0.014
0.041
t-9
0.001
0.012
-0.002
-0.013
0.036
t-10
0.001
0.009
0.001
0.030
0.027
-0.011
0.032
(1 1) in the paper. The first three columns assume slope
he same across countries. The last column reports the mean and standard deviation across
countries of cou ntry-by-country estimates Standard errors for the impulse res ponses in cc lumns (2) and (3) are
simulated using 500 draws from the estimated distribution of coefficients.
Note: This table reports the results of estimating Equation
coefficients are
27
Figure
1:
The Traditional Rule and the New Rule
Traditional Rule
0.1
-
y=0.231x- 0.062
R2 = 0.124
0.05
-
Q.
Q
O
0-
*3
§
(
g
-0.05
-
£
-0.1
-
**
<
3
o
-0.15
-
-0.2
Saving/GDP
New
Rule
0.1
y = 0.939x
§
-0.15
-
0.002
R2 =
0.301
*0.1
*
Ji.Q5,
^ -1W 5
^^^^
1
£
-
W" *
*WM
0.05
**
+
U
-<%-
5
-0.15
-
-0.2
(Saving/GDP) x (Foreign Assets/W 5 alth)
Note:
The top bottom) panel
i
plots the current
account balance as a share of
(gross national saving interacted with the foreign asset position), pooling
unbalanced par lei of 21
OECD
countries over the period 1966-1997.
28
all
GDP
against gross national saving
available annual obs« :rvations for
an
Figure
2:
Portfolio
Growth and the Current Account
Long Run
0.06
y = 1.092x- 0.001
R2 =
Q
o
0.04
0.849
NLD
E
0.02
3
O
u
u
<
E
«
w
i3
-0.06
0.04
0.06
o
a>
D)
CS
i<D
>
<
tL
-0.06
Average(Saving/GDP x Foreign Assets/Wealth)
Short
0.1
y = 0.453x
R2
-
0.001
= 0.026
0.
3
o
?
&s
j3 wk^*
O
u
i_
"
40
*°fi
3
a
n
<°^£j fc4*«~
Q
tE
008
Run
-o
0.1
^r^
BBv ^
++
WalT
(4trW»4
(JpT *3F+
"*
-O.O^H
-o.o£
-
-rfJ
Saving/GDP x Foreign Asset Share
Notes: The top panel plots the period average of the current account as a share of GDP against the period
average of gross national saving as a share of GDP interacted with the share of foreign assets in wealth for an
unbalanced panel of 21 OECD countries over the period 1966-1997. The bottom panel plots the annual current
account as a share of GDP against annual gross national saving as a share of GDP interacted with the annual
foreign asset share, removing country means from both variables.
29
Figure 3 - Persistence of Country Portfolios
0.2
n
01
.
y = 1.098x- 0.020
R2
BB.
= 0.617
NLD
JPN
II
IRL
1996
in
-0.4
-0.3
-0.2
-0.1
y
FRAl^fU
ITAXAinAUT
DNNjrll
GBR
0.1
0.2
PRTy* tSP
CD
USA
fim^TUR
V)
ca^t
(A
V)
SWE
<
/
c
fl)
GKr> -02
-
o
u.
/
-0.3
NZL
-0.4
Foreign Assets/Wealth, 1975
Note: 1 "hroughout the paper, we use an unbalanced panel of 21 OECD countries over the perioc 19661997. J Since we can construct a balanced panel of observations for this set of countries only ove r the
period 975-1996, we use 1975 here as the initial period.
I
'
30
Figure 4
- The Share
of Foreign Assets in Wealth
31
Figure 5 - Portfolio Growth
Creditors
CA
Debtors
Notes: This figure
shock,
in
shows saving
(S),
investment
(I),
and the current account (CA), following a positive
debtor and creditor countries, for the case X=0.
32
Figure 6 - Portfolio Rebalancing
-I
-CA
Notes: This figure
shock,
in
shows saving
a country with zero
(S),
initial
investment
(I),
and the current account (CA) following a
case \>Q.
foreign assets, for the
33
positive
Figure 7 - Portfolio Growth and Portfolio Rebalancing
Creditors
—S
—
I
— CA
Debtors
Notes: This figure shows saving (S), investment
shock,
in
(I),
and the current account (CA), following a
debtor and creditor countries, for the case X>0.
34
positive
Figure
1
00
Regression
8:
Portfolio Rebalancing in Response to Unit Increase in Saving
(Annual Data for 21 Countries)
1
0.80
0.60
-
0.40
0.20
0.00
-0.20
hWtT5
t-6
1-7
t-8
t-9
1-10
-0.40
-0.60 J
Regression 3
1.00
-
0.80
-
60
-
40
-
0.20
-
00
-
Regression 4
-
\
.
-0.20
-
-0.40
-
V\
i
-
-
-
-
-
—±--
1
rp
t-U
ra
t-6
t-7
t-8
—
-+ 2
t-9
no
-0.60
Notes: This figure reports the impulse response of the portfolio rebalancing component of the current account to a one-year unit increase in saving implied by our
estimates Equation (11) under the four different specifications discussed in the text. The vertical bars denote one-standard deviation intervals around the
estimated coefficients.
36
Figure
9:
Response to Unit Increase in Saving
(Quarterly Data for 12 Countries)
Portfolio Rebalancing in
One-Quarter Increase
in
Saving
0.8
06
0.4
0.2
~3>
4
S
5
ft
co
a>
o
-0.2
-0.4
Four-Quarter Increase
1
in
Saving
-
0.8
-
0.6
-
0.4
-
0.2
-
\
t
t-1
t-2
\.
t-3
\ 4
t
5
t
6
t
7
t
8
t
9
t-
t-
1
t-
2
t-
3
t-
4
t-
5
t-
fi
t-
za-U-t-f9-
1
-0.2
-
-0.4
-
-0.6
-
L
^x
Notes: This top (bottom) panel of this figure reports the impulse response of the portfolio rebalancing component
account to a one-quarter (four-quarter) unit increase in saving implied by our estimates Equation
(11), using quarterly data for 12 OECD countries. The vertical bars denote one-standard deviation intervals
around the estimated coefficients.
of the current
38
Figure 10: Investment and the Current Account
Lonq Run
0.06
n
0.04
-
y = -0.036x
0.
a
2
R =
1
0.02
-
0.002
NLD
0.003
-
JPN
mi
BB." DEU
o
o
o
<
£
FRA
o
o
t
3
0.
1
r
ripw
*
i*>A
o
g, "0.02
1TA
GBR
-
0.25^^
FT
"-;
\ tur
0.3
DNK
CAN
PRT
re
L.
V
>
„ AUS
IRL
<
-0.04
-
-0.06
-
0.35
hkT
•
GRC
NZ L
Average
vestment/GDP
In
Short
0.1
-
0.08
-
Run
y=-0.329x- 0.001
R2 =
0.218
IX
Q
c
3
O
o
Ac
2
*lra|£*9N54?«
0.1
Current
-*
-
4D.06
-
-0.08
-
-0.1
-
f-
Investm ent/GDP
account as a share of GDP against gross domestic investment as a share of
OECD countries over the period 1966-1997. The top panel pi ots period
averages, e ind the bottom panel plots deviations from country means.
Notes: Thi
GDP,
3
figure plots the current
using an unbalanced panel of 21
39
Figure 1 1 Investment and the Current Account
In the Long Run In Debtors and Creditors
:
0.06
y = 0.105x- 0.012
R2
0.04
= 0.153
a.
a
o
c
3
o
NLD
0.02
JPN
o
o
<
-»* ITA
c
l
»
15
3
i25WE
0.3
0.35
o
0)
D)
-0.02
A CAN
(5
L.
A
>
<
-0.04
-0.06
IRL
A AUS
A GRC
y = -0.065x - 0.004
R 2 _ 0.014
A NZL
Average Investment/GDP
Notes: This figure plots the period average of the current account as a fraction of GDP against the period
average of gross domestic investment as a fraction of GDP, using an unbalanced panel of 21 OECD countries
over the period 1966-1997. The triangles (squares) correspond to countries with negative (positive) foreign
assets averaged over the same period.
40
2003
Date Due
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