Current Account Deficits During Heightened Risk: Menacing or Mitigating? / Kristin Forbes, Ida Hjortsoe, Tsvetelina Nenova.

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Forbes, Kristin

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w22741.Publication details: Cambridge, Mass. National Bureau of Economic Research 2016.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country's vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two financial factors: income on international investments and changes in the valuations of those investments. We show how the characteristics of a country's international investment portfolio - the size of its international asset and liability holdings, their currency denominations, their split between equity and debt, and their return characteristics - affect the dynamics of these financial factors. Then we decompose those dynamics into their drivers, explore how they are affected by domestic and global risk shocks, and apply this framework to 10 OECD economies. These examples, including a more detailed assessment for the UK, show that a substantial degree of international risk sharing can occur through current accounts and international portfolios. Our flexible framework clarifies which characteristics of a country's international portfolio determine whether a current account deficit is "menacing" or "mitigating".

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w22741 (Browse shelf(Opens below))	Not For Loan

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October 2016.

Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country's vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two financial factors: income on international investments and changes in the valuations of those investments. We show how the characteristics of a country's international investment portfolio - the size of its international asset and liability holdings, their currency denominations, their split between equity and debt, and their return characteristics - affect the dynamics of these financial factors. Then we decompose those dynamics into their drivers, explore how they are affected by domestic and global risk shocks, and apply this framework to 10 OECD economies. These examples, including a more detailed assessment for the UK, show that a substantial degree of international risk sharing can occur through current accounts and international portfolios. Our flexible framework clarifies which characteristics of a country's international portfolio determine whether a current account deficit is "menacing" or "mitigating".