The Current Account as A Dynamic Portfolio Choice Problem

The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into a portfolio rebalancing and a portfolio growth component. This paper provides empirical evid...

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Bibliographic Details
Main Authors:	Didier, Tatiana, Lowenkron, Alexandre
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ACCOUNTING ACTUAL VALUES ADJUSTMENT COSTS AFFILIATED ORGANIZATIONS ALLOCATION MODELS ASSET CLASS ASSET CLASSES ASSET POSITION ASSET POSITIONS AUTOREGRESSION BANKRUPTCY BENCHMARK BINDING CONSTRAINTS BOND RETURNS BOND YIELD BUDGET CONSTRAINT BUSINESS CYCLES CAPITAL FLOWS COMMON CURRENCY CONSTANT MATURITY CONSTRAINTS ON INVESTORS CONSUMPTION DECISION CONSUMPTION DECISIONS CONSUMPTION VOLATILITY CONTROL VARIABLES CORRELATION COEFFICIENT CREDITOR CURRENCY CURRENT ACCOUNT CURRENT ACCOUNT BALANCE CURRENT ACCOUNT BALANCES CURRENT ACCOUNT DEFICIT CURRENT ACCOUNT DYNAMICS CURRENT ACCOUNT IMBALANCES CURRENT ACCOUNT RESPONSE CURRENT ACCOUNT SURPLUS CURRENT ACCOUNTS DATA AVAILABILITY DEBTOR DEPENDENT VARIABLE DEVELOPING COUNTRIES DISCOUNT RATE DIVIDEND DIVIDEND YIELDS DOMESTIC CAPITAL DOMESTIC INVESTOR DOMESTIC INVESTORS DOMESTIC SAVINGS ECONOMETRIC ANALYSIS ECONOMETRICS ECONOMIC RESEARCH ECONOMIC THEORY ELASTICITY EQUATIONS EQUILIBRIUM EQUITIES EQUITY MARKETS EXCESS RETURNS EXCHANGE RATES EXPECTED RETURNS EXPOSURE EXTERNAL POSITIONS FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL ASSET FINANCIAL ASSETS FINANCIAL CONSTRAINTS FINANCIAL INTEGRATION FINANCIAL STABILITY FINANCIAL STATEMENTS FINANCIAL STUDIES FLOW OF FUNDS FOREIGN ASSET FOREIGN ASSET POSITION FOREIGN ASSET POSITIONS FOREIGN ASSETS FOREIGN EQUITY FOREIGN HOLDERS FOREIGN HOLDINGS FOREIGN INVESTMENTS FOREIGN INVESTORS FOREIGN PORTFOLIO FOREIGN PORTFOLIO INVESTORS FOREIGN SECURITIES FREE CAPITAL FUTURE DIVIDENDS FUTURE RESEARCH GDP GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODEL GLOBAL IMBALANCES GNP GOVERNMENT BOND GOVERNMENT BONDS HIGH-INCOME COUNTRIES HOLDINGS HOME COUNTRY INCOME INCOME LEVELS INCOME SHOCK INCOMPLETE MARKETS INFLATION INFLATION RATES INFLATION RISK INSTITUTIONAL INVESTORS INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL FLOWS INTERNATIONAL FINANCE INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL INVESTMENT INVESTING INVESTMENT DECISIONS INVESTMENT HORIZONS INVESTMENT OPPORTUNITIES INVESTMENT OPPORTUNITY LEVEL OF RISK LEVERAGE LOCAL CURRENCY LONG-TERM INVESTMENT LONG-TERM INVESTORS LOW-INCOME COUNTRIES MACROECONOMIC MODELS MACROECONOMIC POLICIES MARGINAL UTILITY MARKET CAPITALIZATION MONETARY FUND NATIONAL SAVINGS NET CAPITAL NET FOREIGN ASSETS NOMINAL EXCHANGE RATE NOMINAL YIELD NOMINAL YIELDS OPPORTUNITY SET OPTIMAL ALLOCATION OPTIMAL CONSUMPTION PATH OPTIMAL PORTFOLIO OPTIMAL PORTFOLIOS PARTIAL EQUILIBRIUM ANALYSIS POLITICAL ECONOMY PORTFOLIO PORTFOLIO ALLOCATION PORTFOLIO ALLOCATIONS PORTFOLIO CHOICE PORTFOLIO CHOICES PORTFOLIO COMPOSITION PORTFOLIO GROWTH PORTFOLIO HOLDINGS PORTFOLIO INVESTMENTS PORTFOLIO RETURN PORTFOLIO RETURNS PORTFOLIOS POSITIVE COEFFICIENT POWER PARITY PRICE RATIO PURCHASING POWER PURCHASING POWER PARITY REAL ASSET REAL EXCHANGE RATE REAL EXCHANGE RATES REGRESSION ANALYSIS RETURN RETURN ON FOREIGN ASSET RETURNS RISK AVERSE RISK AVERSE INVESTORS RISK AVERSION RISK MANAGEMENT ROE SAVINGS RATE SECURITIES SHORT SALES SHORT-TERM BOND SHORT-TERM BONDS SHORT-TERM INSTRUMENT SHORT-TERM INTEREST RATES SHORT-TERM YIELD STANDARD DEVIATION STANDARD DEVIATIONS STOCK EXCHANGE STOCK MARKETS STOCK RETURN STOCK RETURNS STOCKS T-BILL T-BILLS TOTAL MARKET TOTAL MARKET CAPITALIZATION TRANSACTION TRANSACTION COSTS TREASURY TURNOVER UNCERTAINTY UTILITY FUNCTION UTILITY FUNCTIONS VENTURE CAPITALIST VOLATILE CAPITAL VOLATILITY VOLATILITY OF CAPITAL WEALTH WEIGHTS WORLD ECONOMY WORLD PRICE
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090309115148 http://hdl.handle.net/10986/4057

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Summary:	The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into a portfolio rebalancing and a portfolio growth component. This paper provides empirical evidence of the importance of portfolio rebalancing for the dynamics of the current account. The authors evaluate the predictions of a partial-equilibrium model of the current account with dynamic portfolio choices, in which portfolio rebalancing is driven by changes in investment opportunities. Using data for the United States and Japan, the authors find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.

The Current Account as A Dynamic Portfolio Choice Problem

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