This paper studies the impact of the state-dependent risk of a government default on the correlation of the scal balance and current account. We use a small open economy model where nonlinear risk premia arise endogenously when the government operates close to its scal limit, i.e. the maximum...

Global current account imbalances were a major subject of concern in the years before the recent financial crisis. It is shown that the expected (negative) equilibrium relationship between net foreign assets and the trade balance that had held in the previous twenty years appeared to break down...

This paper documents that cross-border investment income flows are important for explaining current account balances in major economies. Those investment incomes reflect returns on cross-border asset holdings and on balance often reach magnitudes around 5% of major economies' gross domestic...