Volatility and the Current Account: Extending the Evidence

Joao Jalles and Georgios Karras

No 2022/0252, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: Consistent with standard theoretical priors, generally based on the precautionary saving motive, the empirical literature has documented that increased macroeconomic volatility is associated with improvements in the current account balance in advanced economies. Using an updated and extended data set, we first confirm this relationship, but also show that it does not hold in developing economies, where macroeconomic volatility is not systematically associated with changes in the current account balance. When we explore potential mechanisms for this asymmetry, we find evidence in favor of precautionary saving in both groups of countries, which allows us to rule this out as the reason behind the observed difference in the current-account/volatility relationship.

Keywords: current account; uncertainty; volatility (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp02522022

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