On the Relationship Between Domestic Saving and the Current Account: Evidence and Theory for Developing Countries

Evi Pappa, Markus Brueckner and Wojtek Paczos
Authors registered in the RePEc Author Service: Markus Brueckner

No 14104, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that domestic saving has: (i) a small effect on the current account; (ii) a significant positive and quantitatively sizable effect on the trade balance; (iii) a significant negative effect on net-current transfers. We use countries in the sub-Saharan African region as a laboratory for an instrumental variables approach. The IV approach enables to obtain estimates of causal effects. Underlying the IV approach is the significant positive first-stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply-side shock. We construct a small open-economy DSGE model with debt adjustment frictions and endogenous net-current transfers to match the empirical findings. The model enables to examine how other types of shocks – such as changes in interest rates or trend TFP for which it is hard to get exogenous variation in the data – affect the relationship between domestic saving and the current account. An important implication of our findings is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving affects a country's accumulation of net foreign assets.

Keywords: Domestic saving; Current account; Net current transfers; Small open economy model; Financial frictions; Feldstein-horioka puzzle (search for similar items in EconPapers)
JEL-codes: F32 F35 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-dge and nep-opm
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP14104 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: On the Relationship between Domestic Saving and the Current Account: Evidence and Theory for Developing Countries (2020)
Working Paper: On the relationship between domestic saving and the current account: Evidence and theory for developing countries (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14104

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14104

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().