Saving to build wealth? An empirical analysis of the high (and increasing) current account surplus in Denmark

In the 2010s, Denmark registered sustained current account surpluses of an average of 8% of gross domestic product (GDP). In trying to explain the nature and causes of this extraordinary performance, recent studies have pointed to a temporary change in the private sector’s financial behavior as the main driver. However, descriptive analysis of the balance of payments shows that the improvement of the current account in the 2010s has been driven by three main elements: (i) the increase in real net exports, (ii) the increase in terms of trade, and (iii) the improvement in the income account. This article explores how the current account balance and the net lending of the Danish private sector would have evolved under alternative scenarios for these three elements. This is done through an empirical quarterly structural macroeconomic model for the period 2005–20, which we use to make counterfactual analyses. We find that, although part of the increase in the current account is due to an increase in domestic savings, as recent studies suggest, the effect of factors specifically related to the external sector has also been significant. Hence, the findings of this article suggest that the high current account surplus of Denmark is more a structural phenomenon than a temporary one, as official reports have been claiming thus far.