Macroeconomic Volatility and External Imbalances

34 Pages Posted: 27 Jan 2015 Last revised: 14 Jul 2021

See all articles by Alessandra Fogli

Alessandra Fogli

Federal Reserve Bank of Minneapolis

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: January 2015

Abstract

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.

Suggested Citation

Fogli, Alessandra and Perri, Fabrizio, Macroeconomic Volatility and External Imbalances (January 2015). NBER Working Paper No. w20872, Available at SSRN: https://ssrn.com/abstract=2555392

Alessandra Fogli (Contact Author)

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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