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Macroeconomic uncertainty, precautionary saving, and the current account

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  • Ghosh, Atish R.
  • Ostry, Jonathan D.

Abstract

The relationship between current account developments and changes in the macroeconomic environment remains a key issue in open economy macroeconomics. This paper extends the standard intertemporal optimizing model of the current account to incorporate the effects of macroeconomic uncertainty on private savings behavior. It is shown that 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 40 (1997)
Issue (Month): 1 (September)
Pages: 121-139

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Handle: RePEc:eee:moneco:v:40:y:1997:i:1:p:121-139

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Web page: http://www.elsevier.com/locate/inca/505566

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  2. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
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  12. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
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