What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks | Zendy

Giancarlo Corsetti | Zendy; Panagiotis Konstantinou | Zendy

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What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks

Author(s) -

Giancarlo Corsetti,

Panagiotis Konstantinou

Publication year - 2012

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.102.2.1062

Subject(s) - economics , shock (circulatory) , net foreign assets , consumption (sociology) , monetary economics , supply shock , demand shock , value (mathematics) , gross output , permanent income hypothesis , econometrics , production (economics) , current account , macroeconomics , monetary policy , market liquidity , exchange rate , medicine , social science , machine learning , sociology , computer science

The joint dynamics of US net output, consumption, and (the market value of) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson (2004), is shown to be consistent with current account theory. US consumption is virtually insulated from transitory shocks, while these contribute to variations in net output and gross foreign positions—consumption is smoothed against temporary fluctuations in returns. A single permanent shock—naturally interpreted as a supply shock—raises consumption swiftly while causing net output to adjust gradually. This leads to persistent, procyclical external deficits, while moving gross assets and liabilities in the same direction

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