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The role of savings and investment in balancing the current account: some empirical evidence from the United States

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  • Giovanni P. Olivei

Abstract

Current account deficits ultimately reflect a disparity between a country's national savings and investment. As such, the issue of how current account balance is achieved in practice can be viewed in terms of whether it is savings or investment that adjusts to an external deficit. In this article, the author examines empirically how savings and investment have responded to current account imbalances in the United States over the past 40 years. The main finding is that, on average, investment was largely responsible for rebalancing the current account in the long run. The finding that investment has borne the largest fraction of the external adjustment conforms with the view that, in the long run, the national savings rate constrains a country's rate of investment. Thus, in a situation with outstanding net external debt, low levels of national savings ultimately imply low levels of domestic investment. To the extent that one views net additions of capital as essential for a country's future growth prospects, low savings may signify a reduction in future standards of living.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2000)
Issue (Month): Jul ()
Pages: 3-14

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Handle: RePEc:fip:fedbne:y:2000:i:jul:p:3-14

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Keywords: Saving and investment;

References

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  1. Reuven Glick & Kenneth Rogoff, 1992. "Global Versus Country-Specific Productivity Shocks and the Current Account," NBER Working Papers 4140, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth Rogoff, 1996. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
  3. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  4. Martin Feldstein, 1992. "The Budget and Trade Deficits Aren't Really Twins," NBER Working Papers 3966, National Bureau of Economic Research, Inc.
  5. Ahmed, S. & Rogers, J.H., 1993. "Government Budget Deficits and Trade Deficits: Are Present Value Constraints Satisfied in Long-Term Data?," Papers 5-93-6, Pennsylvania State - Department of Economics.
  6. Sidney S. Alexander, 1952. "Effects of a Devaluation on a Trade Balance," IMF Staff Papers, Palgrave Macmillan, vol. 2(2), pages 263-278, April.
  7. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
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Cited by:
  1. Abdelaziz Rouabah, 2005. "Les déterminants du solde de la balance des transactions courantes au Luxembourg," BCL working papers 13, Central Bank of Luxembourg.
  2. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
  3. Torsten Schmidt & Torge Middendorf, 2004. "Characterizing Movements of the U.S. Current Account Deficit," RWI Discussion Papers 0024, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
  4. Hubertus Bardt & Michael Groemling, 2004. "Savings in Germany and the United States," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 5(1), pages 40-47, October.

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