A New Perspective on "The New Rule"of the Current Account

Eric van Wincoop and Cédric Tille

No 452, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: In an influential contribution that predates the recent renewed interest in portfolio choice models of international capital flows, Kraay and Ventura (2000) o¤er a "new rule" for the current account that puts portfolio choice at the center of the analysis. The new rule says that in response to a change in saving, the change in the current account is equal to the change in saving times the ratio of net foreign asset to wealth. We show that while the focus on portfolio choice is well placed, the inferences in terms of the international allocation of savings are misleading. Using a simple two-country general equilibrium model with portfolio choice, we show that the "new rule" does not hold; most of an increase in a country's saving will be invested abroad. We also show that the empirical evidence presented in Kraay and Ventura (2000) in favor of the "new rule" is consistent with an expression for the current account that holds in the steady state of almost any model. The "new rule" does not necessarily follow as an implication.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2008/paper_452.pdf (application/pdf)

Related works:
Journal Article: A new perspective on "the new rule"of the current account (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed008:452

Access Statistics for this paper

More papers in 2008 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().