Current Account Adjustment: Some New Theory and Evidence

Shang-Jin Wei and Jiandong Ju

No 851, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: This paper aims to provide a theory of current account adjustment that generalizes the textbook version of the intertemporal approach to current account and places domestic labor market institutions at the center stage. In general, in response to a shock, an economy adjusts through a combination of a change in the composition of goods trade (i.e., intra-temporal trade channel) and a change in the current account (i.e., intertemporal trade channel). The more rigid the labor market, the slower the speed of adjustment of the current account towards its long-run equilibrium. Three pieces of evidence are provided that are consistent with the theory.

Date: 2008
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Working Paper: Current Account Adjustment: Some New Theory and Evidence (2007)
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