NATIONAL BUREAU OF ECONOMIC RESEARCH
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Macroeconomic Volatility and External Imbalances

Alessandra Fogli, Fabrizio Perri

NBER Working Paper No. 20872
Issued in January 2015
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

Does macroeconomic volatility/uncertainty affects 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.

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Document Object Identifier (DOI): 10.3386/w20872

Published: Fogli, Alessandra & Perri, Fabrizio, 2015. "Macroeconomic volatility and external imbalances," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 1-15. citation courtesy of

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