We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics