Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Minneapolis
Staff Report
Macroeconomic Volatility and External Imbalances
Alessandra Fogli
Fabrizio Perri
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.


Download Full text
Cite this item
Alessandra Fogli & Fabrizio Perri, Macroeconomic Volatility and External Imbalances, Federal Reserve Bank of Minneapolis, Staff Report 512, 11 May 2015.
More from this series
JEL Classification:
Subject headings:
Keywords: Business cycles; Current account; Global imbalances; Precautionary saving; Uncertainty
For corrections, contact Jannelle Ruswick ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal