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A Note on the New Rule for the Current Account

Iñaki Erauskin ()

Review of International Economics, 2015, vol. 23, issue 3, 509-524

Abstract: In this note, we show that the two main concerns against the new rule for the current account are flawed. The new rule states that the impact of a transitory income shock on the current account is given by the savings generated by the shock multiplied by the ratio of the net foreign asset position to domestic wealth. First, we adapt the new rule to distinguish between gross and net foreign asset positions. Second, we demonstrate that the results for the new rule are driven neither by an accounting-based “approximate” regression nor a steady state.

Date: 2015
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