CURRENT ACCOUNT DYNAMICS

1
CURRENT ACCOUNT DYNAMICS I. Balance of Payments
(Flows , not stocks)
(1) Current Account ( exports / imports
of goods and services).
Balance
(2) Capital Account ( exports / imports of
securities and financial assets) balance
capital imports or exports
exports of securities ( financial ) capital
imports import of securities ( financial )
capital exports
(3) International Reserves Account
2
Current Account and National Income Account
C consumption Q Gross Domestic Product G
government consumption I investment B
External Debt Y Gross National Product
3
GNP domestic absorption current account
balance
T tax revenue
National Saving
4
Consumption Smoothing
Budget constraints (period by period)
Consumption - possibilities constraint
Permanent Income
5
Consumption smoothing ?
consumption in period 2
W
c
q
1r
W
consumption in period 1
S CAB
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1. Temporary productivity shock
consumption in period 2
c
c
q
q
1r
consumption in period 1
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2. Permanent Productivity Shock
consumption in period 2
c
c
q
q
1r
consumption in period 1
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A Permanent Productivity Shock
consumption in period 2
MPC 1
1r
consumption in period 1
9
3. Personal Savings are the market-forecast of
future decline in GDP
(assume r 0)
assume r ? 0
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Diagram Useful to Analyze Dynamics of the
Current Account Balance
S
r
CAB
r
I
I,S
1. r?? S?, I? 2. Temporary productivity
increase 3. Permanent productivity increase 4.
Budget deficit through (1) tax reduction (2) rise
in G 5. A stock market crash by 10
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Consumers
There is not taxes on interest rate payments
Government
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(1) Emerging markets current account deficits
driven by excessive investments (2)
Reversal of current account deficits achieved
through (1) Real depreciation
(2) Output contraction (3) Japans current
account surplus ? high saving rates (4)
Sustainability of current account deficit depend
on debt, equity and FDI finance
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Resource Constraint
Permanent income
Current Account Balance
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For every variable X define its corresponding
permanent variable
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Intertemporal Budget Constraint

and Consumption-Smoothing Current Account Balance
(1)
Definition
permanent X
(2) Deviations from permanent
(3)
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Consumption Smoothing
? current account deficits reflect expected
increases in future net output