Reference no: EM133134193

The Cyclicality of the Current Account2 Precautionary Savings Pick a country besides the United States. Find data on their current account, as a fraction of GDP, over time, as well as the annual GDP growth of that country. Make sure you haveat least 20 years of data. Is the current account procyclical, countercyclical, or is it not clear from the data?Present a figure that demonstrates your conclusion. Make sure to format it enough so that a casual reader would agree.

Suppose an agent is trying to maximize utility

U = log c1 + β(π log cb + (1 -π) log cr)log is the natural log. GDP is as follows: y1 = 2000, yb = 2240, yr = 1400, π = .8β = .8 and 1 + r = 1.25. The only asset available is the riskless bond.

1. Write down the definition of the current account, that relates y, x and c in each state.

2. How does x1, xb and xr relate?

3. Plug those equations into the maximization problem and take first order conditions4. What is the Euler equation?

5. Solve for x1.Now instead, imagine there was a world without risk. Instead of being uncertain about
y, the country knew they would gety2 = 2240 ×.8 + 1400 ×.2 = 2072

6. What is the Euler equation now?7. What is x1?

8. Did risk lead to a higher or lower current account?