Introducing Valuation Effects-Based External Balance Analysis into the Undergraduate Macroeconomics Curricula: A Simple Framework with Applications

Abstract

Global imbalances and the sustainability of large U.S. current account deficits have dominated international macroeconomics of late. Pedagogically, a clear disconnect exists between graduate-level open-economy macroeconomics that emphasizes intertemporal current account models and net foreign asset adjustment featuring valuation effects, and, undergraduate macroeconomics that is still driven by static analysis of U.S. current account deficits and cursory coverage of valuation-effects-driven external balance adjustment. The authors of this article discuss a simple intertemporal framework, based on modern open-economy macroeconomic models, that emphasizes the significance of valuation effects arising from changes in asset prices and exchange rates. The authors also highlight the relevance of the framework by examining a few topical applications related to prominent puzzles and debates in open-economy macroeconomics.

Keywords:

• current account
• intertemporal framework
• valuation effects

JEL codes:

• A22
• F21
• F31
• F41

Acknowledgments

The authors thank JEE Associate Editor David Colander for his valuable suggestions. Also, helpful comments provided by anonymous referees are much appreciated.