Macroeconomic Uncertainty, Precautionary Savings and the Current Account

Jonathan Ostry and Atish Ghosh ()

No 1992/072, IMF Working Papers from International Monetary Fund

Abstract: The relationship between current account developments and changes in the macroeconomic environment remains a key issue in open economy macroeconomics. This paper extends the standard intertemporal optimizing model of the current account to incorporate the effects of macroeconomic uncertainty on private savings behavior. It is shown that the greater the uncertainty in national cash flow, defined as output less investment less government expenditure, the greater is the precautionary demand for savings and, other things equal, the larger is the current account surplus. Empirical support for the model is found using quarterly data from four large industrial countries.

Keywords: WP; detrended current account; national cash flow; current account determination; current account dynamics; cash flow variable; Current account; Currencies; Consumption; Current account surpluses; Income (search for similar items in EconPapers)
Pages: 44
Date: 1992-09-01
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Journal Article: Macroeconomic uncertainty, precautionary saving, and the current account (1997)
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