Current Account Deficits During Heightened Risk: Menacing or Mitigating?
Author(s)
Hjortsoe, Ida
Nenova, Tsvetelina
Forbes, Kristin J
Date Issued
May 2017
Journal
Economic Journal
Publisher
Wiley
Citation
Forbes, Kristin et al. “Current Account Deficits During Heightened Risk: Menacing or Mitigating?*.” The Economic Journal 127, 601 (May 2017): 571–623 © 2017 Royal Economic Society
Version
Original manuscript
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. We develop a framework to evaluate such vulnerabilities and clarify which characteristics of a country’s international investment portfolio determine whether a current account deficit is ‘menacing’ or ‘mitigating’. Financial factors, namely international investment income and valuation changes on international investments, are critical. Our framework explores how domestic and global risk shocks affect these factors. An application to 10 OECD economies shows that a substantial degree of international risk sharing can occur through current accounts and international portfolios.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1111/ECOJ.12482
