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The Role of Stock Markets in Current Account Dynamics: a Time-Series Approach

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  • Benoît Mercereau

Abstract

This paper develops a simple model to study the impact of stock markets on the current account. 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 Jeffrey Sachs. It appears to shed light on recent developments in the U.S. current account deficit. The model also shows how the current account may help predict future stock market performance and/or endowment streams.

Suggested Citation

  • Benoît Mercereau, 2004. "The Role of Stock Markets in Current Account Dynamics: a Time-Series Approach," IMF Working Papers 2004/050, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/050
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    References listed on IDEAS

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    Cited by:

    1. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
    2. Rangan Gupta & Anandamayee Majumdar & Mark E. Wohar, 2017. "The Role of Current Account Balance in Forecasting the US Equity Premium: Evidence From a Quantile Predictive Regression Approach," Open Economies Review, Springer, vol. 28(1), pages 47-59, February.
    3. Mercereau, Benoit, 2006. "Stock markets and the real exchange rate: An intertemporal approach," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1130-1145, November.
    4. Kitamura, Yoshihiro, 2009. "The current account and stock returns," Research in International Business and Finance, Elsevier, vol. 23(3), pages 302-321, September.
    5. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
    6. Nikolaos Antonakakis & Rangan Gupta & Aviral K. Tiwari, 2018. "Time-varying correlations between trade balance and stock prices in the United States over the period 1792 to 2013," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(4), pages 795-806, October.
    7. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    8. Benoît Mercereau, 2003. "Stock Markets and the Real Exchange Rate: An Intertemporal Approach," IMF Working Papers 2003/109, International Monetary Fund.
    9. Chen Kuo, 2013. "Is the liberalization policy effective on improving bivariate cointegration of current accounts, foreign exchange, stock prices? Further evidence from Asian markets," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(4), pages 1923-1941, June.

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    WP; stock market boom;

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