Is the Korean current account consistent with her growth prospects?

Abstract

Engel and Rogers (2006) build a model in which a country should run a current account deficit if she expects higher future income than the rest of the world. Their model is, however, inconsistent with the experience of Korea since Korea often has run current account surpluses even when Korean growth rates have exceeded those of the rest of the world. By introducing rule-of-thumb consumers with a government budget balance explicitly modeled, this paper shows that the current account surpluses in Korea may be consistent with a simple intertemporal open economy model.