What Drives US Foreign Borrowing? Evidence on External Adjustment to Transitory and Permanent Shocks

Giancarlo Corsetti and Panagiotis Th. Konstantinou ()
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Panagiotis Th. Konstantinou: Department of Economics, University of Macedonia

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction.

Keywords: Current Account; Net ForeignWealth; Consumption Smoothing; Intertemporal Approach to the Current Account; International Adjustment Mechanism; Permanent-Transitory Decomposition. (search for similar items in EconPapers)
JEL-codes: C32 E21 F32 F41 (search for similar items in EconPapers)
Date: 2009-01, Revised 2009-01
New Economics Papers: this item is included in nep-bec, nep-cba, nep-mac and nep-opm
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks (2012)
Working Paper: What Drives US Foreign Borrowing? Evidence on External Adjustment to Transitory and Permanent Shocks (2009)
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