The Role of Stock Markets in Current Account Dynamics: a Time Series Approach
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Benoit Mercereau
This paper develops a simple model to study the impact of stock markets on the current account. The model allows for an arbitrary number of risky assets, which form an incomplete market, as well as a risk-free bond. A closed-form solution for the current account 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 Sachs. In order to make the main points of the model clear, I first solve it taking prices as given. A general equilibrium is analyzed in a companion paper.I suggest that the model sheds light on the recent US current account deficit. Some claim that this current account deficit reflects over-optimistic -“irrationally exuberant”- expectations of future stock market performance. The model, however, suggests that it is optimal for a country to run a current account deficit even if people do not expect the stock market boom to last. Another insight afforded by the model is that the current account may help predict future stock market performance and/or future endowments streams. This forecasting property can be formally expressed by a set of Granger causality and Granger causal priority propositions.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
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- Shiftwork, Adjustment Costs and Uncertainty
- How Do Future Constraints Affect Current Investment?
- The Politics of Endogenous Growth
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- Fractional Integration with Bloomfield Disturbances in the Specification of Real Output in the G7 Countries
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- On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence
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- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
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- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
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- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
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Articles in the same Issue
- Topics Article
- Balance of Payments Constrained Non-Scale Growth and the Population Puzzle
- The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure
- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
- How Prudent are Community Representative Consumers?
- Price Distribution in a Symmetric Economy
- The Role of Stock Markets in Current Account Dynamics: a Time Series Approach
- Shiftwork, Adjustment Costs and Uncertainty
- How Do Future Constraints Affect Current Investment?
- The Politics of Endogenous Growth
- Sticky Prices, Coordination and Enforcement
- Fractional Integration with Bloomfield Disturbances in the Specification of Real Output in the G7 Countries
- Monetary Policy When the Nominal Short-Term Interest Rate is Zero
- High-Tech Human Capital: Do the Richest Countries Invest the Most?
- Substitution Elasticities and Investment Dynamics in Two-Country Business Cycle Models
- Contributions Article
- On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence
- Optimal Monetary Policy and the Correlation between Prices and Output
- Are Banking Supervisory Data Useful for Macroeconomic Forecasts?
- An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
- Idle Capital and Long-Run Productivity
- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
- Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory
- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
- Finance Causes Growth: Can We Be So Sure?
- Advances Article
- Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target
- Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index
