GLOBAL VERSUS COUNTRY-SPECIFIC PRODUCTIVITY SHOCKS AND THE CURRENT ACCOUNT

This paper develops an analytically tractable empirical model of inves tment and the current account, and applies it to data from the G-7 cou ntries. The distinction between global and country-specific shocks tur ns out to be quite important for explaining current account behavior; overall the model performs surprisingly well. One apparent puzzle, how ever, is that the current account responds by much less than investmen t to country-specific shocks, despite the near unit root behavior of t hese shocks. We show theoretically that this apparent anomaly can be e xplained if the shocks have very slow mean reversion.