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The Great Moderation and the U.S. External Imbalance

Alessandra Fogli and Fabrizio Perri

Monetary and Economic Studies, 2006, vol. 24, issue S1, 209-225

Abstract: The early 1980s marked the onset of two striking features of the current world macroeconomy: the fall in U.S. business cycle volatility (the "great moderation") and the large and persistent U.S. external imbalance. In this paper, we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its incentives to accumulate precautionary savings fall and this results in a permanent deterioration of its external balance. To assess how much of the current U.S. imbalance can be explained by this channel, we consider a standard two-country business cycle model in which households are subject to business cycle shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like that observed in the United States can account for about 20 percent of the actual U.S. external imbalance.

Keywords: Business cycle volatility; Precautionary saving; Current account; Net foreign asset position (search for similar items in EconPapers)
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: The "great moderation'' and the US external imbalance (2007) Downloads
Working Paper: The 'Great Moderation' and the US External Imbalance (2006) Downloads
Working Paper: The "Great Moderation" and the US External Imbalance (2006) Downloads
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