Working Paper: NBER ID: w20872
Authors: Alessandra Fogli; Fabrizio Perri
Abstract: Does macroeconomic volatility/uncertainty affects 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.
Keywords: Macroeconomic Volatility; External Imbalances; Net Foreign Assets
JEL Codes: F32; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in domestic uncertainty (D89) | increased precautionary saving (E21) |
| increased precautionary saving (E21) | changes in net foreign asset positions (F32) |
| changes in country-specific aggregate volatility (F44) | net foreign asset position (F32) |
| increases in domestic uncertainty (D89) | changes in net foreign asset positions (F32) |