The Role of Stock Markets in Current Account Dynamics: A Time Series Approach

Abstract

This paper develops a simple model to study the impact of stock markets on the current account. A closed-form solution for the current is derived from the optimal portfolio and consumption/saving choices of a representative agent. Formally, the model can be seen as a stock market-augmented version of the fundamental equation of the current account popularized by Jeffrey Sachs. It appears to shed light on recent developments in the U.S. current deficit. The model also shows how the current may help predict future stock market performance and/or endowment streams.