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Macroeconomic Volatility and External Imbalances

Staff Report 512 | Published May 11, 2015

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Alessandra Fogli Assistant Director, Inequality Research and Monetary Advisor
Fabrizio Perri Assistant Director and Monetary Advisor
Macroeconomic Volatility and External Imbalances


Does macroeconomic volatility/uncertainty affect accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this relationship. The key mechanism is precautionary motive: more uncertainty induces residents to save more, and higher savings are in part channeled into foreign assets. We conclude that both data and theory suggest uncertainty/volatility is an important determinant of the medium/long run evolution of external imbalances in developed countries.

Published in: _Journal of Monetary Economics_ (Vol. 69, January 2015, pp. 1-15)