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The 'Great Moderation' and the US External Imbalance

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Author Info
Fogli, Alessandra
Perri, Fabrizio

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Abstract

The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the “great moderation”) and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6010.

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Date of creation: Dec 2006
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Handle: RePEc:cpr:ceprdp:6010

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Related research
Keywords: business cycle volatility; current account; net foreign asset position; precautionary saving;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
  5. David Backus & Espen Henricksen & Frederic Lambert & Chris Telmer, 2005. "Current Account Fact and Fiction," 2005 Meeting Papers 115, Society for Economic Dynamics.
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  9. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November. [Downloadable!] (restricted)
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  11. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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  17. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcel Fratzscher & Luciana Juvenal & Lucio Sarno, 2007. "Asset prices, exchange rates and the current account," Working Paper Series 790, European Central Bank. [Downloadable!]
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  2. Ellen R. McGrattan & Edward C. Prescott, 2009. "Technology capital and the U.S. current account," Staff Report 406, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Irineu E. Carvalho Filho & Rudolfs Bems, 2009. "Current Account and Precautionary Savings for Exporters of Exhaustible Resources," IMF Working Papers 09/33, International Monetary Fund. [Downloadable!]
  4. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Silvio Contessi & Pierangelo DePace & Johanna Francis, 2008. "The cyclical properties of disaggregated capital flows," Working Papers 2008-041, Federal Reserve Bank of St. Louis. [Downloadable!]
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  6. James M. Nason & Gregor W. Smith, 2007. "Great Moderation(s) and U.S. Interest Rates: Unconditional Evidence," Working Papers 1140, Queen's University, Department of Economics. [Downloadable!]
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  7. Bonilla, Eugenio Diaz, 2008. "Global macroeconomic developments and poverty:," IFPRI discussion papers 766, International Food Policy Research Institute (IFPRI). [Downloadable!]
  8. James Feigenbaum & Geng Li, 2008. "A Nonparametric Characterization of Income Uncertainty over the Lifecycle," Working Papers 359, University of Pittsburgh, Department of Economics, revised Jul 2008. [Downloadable!]
  9. Jonathan Pincus & Richard Pomfret, 2009. "The Financial Sector And The Future Of Capitalism," Working Papers 2009-05, University of Adelaide, School of Economics. [Downloadable!]
  10. Marcel Fratzscher & Roland Straub, 2009. "Asset Prices and Current Account Fluctuations in G7 Economies," Working Paper Series 1014, European Central Bank. [Downloadable!]
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