An asset-pricing view of external adjustment
Recent literature has argued that conventional measures of external sustainability – the trade balance and current account – are misleading because they omit capital gains on net foreign asset positions. We adjust the definition of the current account to include the capital gains and discuss how thi...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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Elsevier Science Direct
2011
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| Online Access: | http://hdl.handle.net/1721.1/65373 https://orcid.org/0000-0002-9054-3804 |
| _version_ | 1826188612224417792 |
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| author | Pavlova, Anna Rigobon, Roberto |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Pavlova, Anna Rigobon, Roberto |
| author_sort | Pavlova, Anna |
| collection | MIT |
| description | Recent literature has argued that conventional measures of external sustainability – the trade balance and current account – are misleading because they omit capital gains on net foreign asset positions. We adjust the definition of the current account to include the capital gains and discuss how this may affect our thinking about external adjustment and sustainability. We do so in the context of a two-country macro-finance model of Pavlova and Rigobon (2008a) that allows exploration of the interconnections between equilibrium portfolios and external accounts' dynamics. We calibrate the model and find that it generates several testable implications, some of which have already been validated empirically. First, we establish dynamic properties of the capital-gains adjusted current account and show that they are fundamentally different from those of the conventional current account. Second, we find that capital gains have a stabilizing effect on the trade balance and the current account. Finally, we demonstrate that in response to a shock, the conventional and the capital-gains adjusted current accounts may move in opposite directions. |
| first_indexed | 2024-09-23T08:02:18Z |
| format | Article |
| id | mit-1721.1/65373 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T08:02:18Z |
| publishDate | 2011 |
| publisher | Elsevier Science Direct |
| record_format | dspace |
| spelling | mit-1721.1/653732022-09-23T10:27:47Z An asset-pricing view of external adjustment Pavlova, Anna Rigobon, Roberto Sloan School of Management Roberto, Rigobon Rigobon, Roberto Recent literature has argued that conventional measures of external sustainability – the trade balance and current account – are misleading because they omit capital gains on net foreign asset positions. We adjust the definition of the current account to include the capital gains and discuss how this may affect our thinking about external adjustment and sustainability. We do so in the context of a two-country macro-finance model of Pavlova and Rigobon (2008a) that allows exploration of the interconnections between equilibrium portfolios and external accounts' dynamics. We calibrate the model and find that it generates several testable implications, some of which have already been validated empirically. First, we establish dynamic properties of the capital-gains adjusted current account and show that they are fundamentally different from those of the conventional current account. Second, we find that capital gains have a stabilizing effect on the trade balance and the current account. Finally, we demonstrate that in response to a shock, the conventional and the capital-gains adjusted current accounts may move in opposite directions. Fondation Banque de France 2011-08-25T19:32:19Z 2011-08-25T19:32:19Z 2009-09 2009-09 Article http://purl.org/eprint/type/JournalArticle 0022-1996 http://hdl.handle.net/1721.1/65373 Pavlova, Anna, and Roberto Rigobon. “An Asset-pricing View of External Adjustment.” Journal of International Economics 80.1 (2010) : 144-156. Copyright © 2010, Elsevier https://orcid.org/0000-0002-9054-3804 en_US http://dx.doi.org/10.1016/j.jinteco.2009.09.003 Journal of International Economics Creative Commons Attribution-Noncommercial-Share Alike 3.0 http://creativecommons.org/licenses/by-nc-sa/3.0/ application/pdf Elsevier Science Direct MIT web domain |
| spellingShingle | Pavlova, Anna Rigobon, Roberto An asset-pricing view of external adjustment |
| title | An asset-pricing view of external adjustment |
| title_full | An asset-pricing view of external adjustment |
| title_fullStr | An asset-pricing view of external adjustment |
| title_full_unstemmed | An asset-pricing view of external adjustment |
| title_short | An asset-pricing view of external adjustment |
| title_sort | asset pricing view of external adjustment |
| url | http://hdl.handle.net/1721.1/65373 https://orcid.org/0000-0002-9054-3804 |
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