International Portfolios and the U.S. Current Account

This paper presents a dynamic three-country endowment model, with both traded and non-traded goods. The main innovation of the model is the introduction of evolutionary dynamic preferences that explain consumption patterns and international portfolio composition. The model departs from a home-biased state of the world that decreases through time creating a rebalancing effect on the international portfolio, raising the demand for the high-income country assets. The model sheds light on the behavior of the current accounts and the bilateral current accounts of the three countries. Results of the simulations are presented and the significant implication on what it is the current account sustainability of the U.S. and its future path is analyzed