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Savings–investment and the current account More measurement than identity

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  • Beckmann, Joscha
  • Belke, Ansgar
  • Gros, Daniel

Abstract

Econometric estimates of the determinants of current account (im)balances invariably start with the accounting “identity” that the current account is equal to the difference between (national) savings and (national) investment. However, this accounting relationship does not hold in the official data. The measurement errors are small but still significant for G-7 countries, and for other countries, these errors are often large (> 5% GDP), especially for less-developed countries. Larger samples imply thus also larger measurement errors. Moreover, there are important differences among the data that different widely used international sources such as the World Bank or the IMF have reported. This should be defined in full here. We illustrate the importance of these measurement errors in two ways: (1) the simple correlations between savings and investment often used to gauge capital mobility (the Feldstein–Horioka (1980) paradox) appear to be very different when different data sources are used, and (2) in a standard model for current account determination, using savings minus investment instead of the current account leads to some significantly different results, regarding the significance of the level of GDP per capita or banking crisis.

Suggested Citation

  • Beckmann, Joscha & Belke, Ansgar & Gros, Daniel, 2022. "Savings–investment and the current account More measurement than identity," Journal of International Money and Finance, Elsevier, vol. 121(C).
    • Handle: RePEc:eee:jimfin:v:121:y:2022:i:c:s0261560621001583
    DOI: 10.1016/j.jimonfin.2021.102507
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    More about this item

    Keywords

    Current account; Savings; Investment; Measurement error; Feldstein-Horioka paradox;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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