Current Account and Exchange Rate Dynamics in Presence of Risk and Economic Shocks

The paper is using a two period model of consumption and current account balance and tries to determine the dynamics of the exchange rates by taking into consideration the increases in oil prices, national debts, budget and trade deficits, the global uncertainty, and the enormous liquidity, due to the recent financial crisis and recession. Specifically, in this paper we have used the insights of an intertemporal model of consumption to analyze the recent behavior of the current account balance in the U.S. We have examined the roles of risk, price of gold, price of oil, TED spread, as well as interest rate, GDP and government spending. We have also analyzed the behavior of spot rate.