We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data.
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✩ We are grateful for comments by Mark Bils, Martin Boileau, Jay Hong, Gian Maria Milesi-Ferretti, Fabrizio Perri, David Romer, an anonymous referee, and participants at various seminars and conferences. We also thank Jinhee Woo for his excellent research assistance. Chang acknowledges support from the WCU Program through the Korea Research Foundation (WCU-R33-10005). Kim acknowledges support from the Korea Research Foundation (KRF-2009-327-B00119). The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy. * Corresponding author at: Department of Economics, University of Rochester, Rochester, NY 14627, United States. Fax: +1 585 256 2309. E-mail address: email@example.com (Y. Chang). 1 Since 2009, during the ‘Great Recession’, a sharp adjustment has again been forced on many countries with large current account deficits, not only in emerging markets but also in advanced economies. In particular, the developments in Greece had far-reaching effects on many countries in the euro area. For example, see “The euro-zone crisis: Europe’s three great delusions”, The Economist, May 22nd–28th, 2010, p. 12.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics