 The current account as a dynamic portfolio choice problemTatiana Didier () and Alexandre Lowenkron Journal of the Japanese and International Economies, 2012, vol. 26, issue 4, 518-541 Abstract: The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into portfolio rebalancing and portfolio growth components, as highlighted by theoretical models. The empirical literature draws attention to the relative importance of portfolio rebalancing to explain fluctuations in capital flows, although they do not shed light on the mechanisms behind these rebalancing effects. In this paper, we provide empirical evidence of the importance of portfolio rebalancing driven by changes in investment opportunities for the dynamics of the current account. In particular, we evaluate the predictions of a partial-equilibrium model of the current account with dynamic portfolio choices, in which portfolio rebalancing is driven by changes in expected asset returns. Focusing on the dynamics of the current account between Japan and the US, we find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows. Keywords: International investment; Portfolio choice; Current account balance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:26:y:2012:i:4:p:518-541 DOI: 10.1016/j.jjie.2012.08.005 Access Statistics for this article Journal of the Japanese and International Economies is currently edited by Takeo Hoshi More articles in Journal of the Japanese and International Economies from Elsevier |
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