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Volatility and the Current Account: Extending the Evidence

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  • João Tovar Jalles
  • Georgios Karras

Abstract

Consistent with standard theoretical priors, generally based on the precautionary saving motive, the empirical literature has documented that increased macroeconomic volatility is associated with improvements in the current account balance in advanced economies. Using an updated and extended data set, we first confirm this relationship, but also show that it does not hold in developing economies, where macroeconomic volatility is not systematically associated with changes in the current account balance. When we explore potential mechanisms for this asymmetry, we find evidence in favor of precautionary saving in both groups of countries, which allows us to rule this out as the reason behind the observed difference in the current-account/volatility relationship.

Suggested Citation

  • João Tovar Jalles & Georgios Karras, 2022. "Volatility and the Current Account: Extending the Evidence," Working Papers REM 2022/0252, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp02522022
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    References listed on IDEAS

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    More about this item

    Keywords

    current account; uncertainty; volatility;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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