A new perspective on "the new rule"of the current account

Cédric Tille and Eric van Wincoop

Journal of International Economics, 2010, vol. 80, issue 1, 89-99

Abstract: In an influential series of contributions, Kraay and Ventura (2000, 2003) offer a "new rule" for the current account: in response to a temporary income shock, the change in the current account is equal to the change in saving times the ratio of net foreign assets to wealth. We analyze the impact of a temporary income shock on the current account in the context of a two-country dynamic general equilibrium model of portfolio choice and show that the new rule does not hold. We also show that the cross-section evidence reported by Kraay and Ventura in favor of the new rule is a feature implied by the steady state of the model that is conceptually distinct from the new rule. We argue that the new rule could only hold in a model with one-way capital flows (only inflows or outflows, but not both), a feature that is strongly counterfactual.

Keywords: International; capital; flows; The; current; account; The; new; rule (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (7)

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Working Paper: A New Perspective on "The New Rule"of the Current Account (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:80:y:2010:i:1:p:89-99

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