Macroeconomic Uncertainty, Precautionary Savings and the Current Account
IMF Working Papers, September 1, 1992
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Bibliographic details
- Authors: Jonathan David Ostry, Atish R. Ghosh
- Published: September 1, 1992
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451959048.001
Summary and central thesis
- Extends the standard intertemporal optimizing model of the current account to incorporate the effects of macroeconomic uncertainty on private savings behavior.
- Key theoretical result: 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.
Theoretical framework and definitions
- Uses an intertemporal optimizing model of the current account.
- Defines national cash flow as: output less investment less government expenditure.
- Links macroeconomic uncertainty in national cash flow to precautionary savings behavior and current account dynamics.
Empirical approach and evidence
- Empirical analysis based on quarterly data from four large industrial countries.
- Reports empirical support for the model’s prediction that increased uncertainty in national cash flow raises precautionary savings and current account surpluses.
Key findings
- Greater uncertainty in national cash flow increases precautionary demand for savings.
- Increased precautionary savings, other things equal, lead to larger current account surpluses.
- Model predictions are supported empirically for the four large industrial countries analyzed with quarterly data.