Current Account Deficits During Heightened Risk: Menacing or Mitigating?

Kristin Forbes, Ida Hjortsoe and Tsvetelina Nenova ()

No 22741, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country’s vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two financial factors: income on international investments and changes in the valuations of those investments. We show how the characteristics of a country’s international investment portfolio – the size of its international asset and liability holdings, their currency denominations, their split between equity and debt, and their return characteristics – affect the dynamics of these financial factors. Then we decompose those dynamics into their drivers, explore how they are affected by domestic and global risk shocks, and apply this framework to 10 OECD economies. These examples, including a more detailed assessment for the UK, show that a substantial degree of international risk sharing can occur through current accounts and international portfolios. Our flexible framework clarifies which characteristics of a country’s international portfolio determine whether a current account deficit is “menacing” or “mitigating”.

JEL-codes: F21 F32 F36 F42 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-acc, nep-ifn and nep-opm
Note: IFM ME
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Citations: View citations in EconPapers (7)

Published as Kristin Forbes & Ida Hjortsoe & Tsvetelina Nenova, 2017. "Current Account Deficits During Heightened Risk: Menacing or Mitigating?," The Economic Journal, vol 127(601), pages 571-623.

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Journal Article: Current Account Deficits During Heightened Risk: Menacing or Mitigating? (2017)
Working Paper: Current account deficits during heightened risk: menacing or mitigating? (2016)
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