The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from...

Recent theoretical development in closed-economy macroeconomics are extended to open economies to investigate the dynamics of the current account of the balance of payments and the effects of fiscal policies.