Macroeconomic Volatility and External Imbalances

Alessandra Fogli and Fabrizio Perri

No 512, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Does macroeconomic volatility/uncertainty affect accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this relationship. The key mechanism is precautionary motive: more uncertainty induces residents to save more, and higher savings are in part channeled into foreign assets. We conclude that both data and theory suggest uncertainty/volatility is an important determinant of the medium/long run evolution of external imbalances in developed countries.

Keywords: Current account; precautionary savings; Global imbalances; Business cycles; Uncertainty (search for similar items in EconPapers)
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015-05-11
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Related works:
Journal Article: Macroeconomic volatility and external imbalances (2015)
Working Paper: Macroeconomic Volatility and External Imbalances (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:512

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