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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.

Suggested Citation

  • Giovanni P. Olivei, 2000. "The role of savings and investment in balancing the current account: some empirical evidence from the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 3-14.
  • Handle: RePEc:fip:fedbne:y:2000:i:jul:p:3-14
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    References listed on IDEAS

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    1. Henning Bohn, "undated". "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 03-91, Wharton School Rodney L. White Center for Financial Research.
    2. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February.
    3. Ahmed, Shaghil & Rogers, John H., 1995. "Government budget deficits and trade deficits Are present value constraints satisfied in long-term data?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 351-374, November.
    4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
    5. Sidney S. Alexander, 1952. "Effects of a Devaluation on a Trade Balance," IMF Staff Papers, Palgrave Macmillan, vol. 2(2), pages 263-278, April.
    6. Martin Feldstein, 1992. "The Budget and Trade Deficits Aren't Really Twins," NBER Working Papers 3966, National Bureau of Economic Research, Inc.
    7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    8. 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. Hubertus Bardt & Michael Groemling, 2004. "Savings in Germany and the United States," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(1), pages 40-47, October.
    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. Abdelaziz Rouabah, 2005. "Les déterminants du solde de la balance des transactions courantes au Luxembourg," BCL working papers 13, Central Bank of Luxembourg.
    4. Bardt, Hubertus & Grömling, Michael, 2003. "Sparen in Deutschland und den USA," IW-Trends – Vierteljahresschrift zur empirischen Wirtschaftsforschung, Institut der deutschen Wirtschaft Köln (IW) / Cologne Institute for Economic Research, vol. 30(3), pages 30-40.

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    Keywords

    Saving and investment;

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