GLOBAL VERSUS COUNTRY-SPECIFIC PRODUCTIVITY SHOCKS AND THE CURRENT ACCOUNT

This paper develops an analytically tractable empirical model of investment and the current account, and applies it to data from the G-7 countries. The distinction between global and country-specific shocks turns out to be quite important for explaining current account behavior; overall the model performs surprisingly well. One apparent puzzle, however, is that the current account responds by much less than investment to country-specific shocks, despite the near unit root behavior of these shocks. We show theoretically that this apparent anomaly can be explained if the shocks have very slow mean reversion.