TY  - JOUR
AU  - Fogli,Alessandra
AU  - Perri,Fabrizio
TI  - The "Great Moderation" and the US External Imbalance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12708
PY  - 2006
Y2  - November 2006
UR  - http://www.nber.org/papers/w12708
L1  - http://www.nber.org/papers/w12708.pdf
N1  - Author contact info:
Alessandra Fogli
Federal Reserve Bank of Minneapolis,
Research Department
90 Hennepin Avenue, P.O. Box 291
Minneapolis, MN 55480-0291
E-Mail: afogli@umn.edu

Fabrizio Perri
University of Minnesota
Department of Economics
4-177 Hanson Hall
Minneapolis, MN 55455
Tel: 612/625-7504
Fax: 612/624-0209
E-Mail: fperri@umn.edu
AB  - The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the "great moderation") and the large and persistent US 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 relative incentives to accumulate precautionary savings fall and this results in an equilibrium  permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.
ER  -