Macroeconomic volatility and external imbalances

This paper studies the impact of macroeconomic volatility/uncertainty on the accumulation of net foreign assets of a country. We first show that, in OECD economies over the period 1970-2012, increases in country specific macroeconomic volatility are, after controlling for wide array of factors, significantly associated with accumulation of net foreign assets. An increase in volatility (measured as standard deviation of GDP growth) of 0.5% over a period 10 years, is associated with an increase in net foreign assets of around 8% of GDP. We then show a that standard open economy model with time varying macroeconomic uncertainty can quantitatively account for this relationship. The key mechanism is agents’ precautionary motive: an increase in relative macro uncertainty induces more savings, which are mostly channeled in the accumulation of foreign assets. We conclude that macroeconomic volatility is a major factor in determining the medium and long run evolution of external imbalances across OECD countries. jel codes: f32, f34, f41 key words: Business cycles, Current account, Global Imbalances, Precautionary saving, Uncertainty ∗We thank Ctirad Slavik and Alberto Polo for outstanding research assistance, Cedric Tille and Daniele Siena for very insightful discussions, seminar participants at several institutions and conferences for very helpful comments. We also thank the European research Council for financial support under grant Grant 313671 ”RESOCONBUCY”. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.