Savings, the size of the net foreign asset position, and the dynamics of current accounts

Abstract

In this paper, we show that the impact of a transitory income shock on the current account is equal to a combination of the traditional rule (i.e., the amount of savings) and the new view (i.e., the marginal unit of capital is equal to the average unit of capital), or a combination of the traditional rule and the new rule (i.e., the amount of savings multiplied by the net foreign asset position over domestic wealth) when growth rates are similar. The empirical evidence suggests that the support for the traditional rule and the new view or the new rule depends crucially on the size of the net foreign asset position of the country. For “moderate” net foreign asset positions the new view or the new rule dominate. However, for “large” creditor or debtor countries the traditional rule dominates, but the reaction is weaker for debtor countries.