Macroeconomic uncertainty, precautionary saving, and the current account

The relationship between current account developments and changes in the macroeconomic environment is a key issue in open economy macroeconomics. This paper extends the standard intertemporal model of the current account to incorporate the effects of macroeconomic uncertainty on external saving behavior. It is shown that the greater the uncertainty in national cash flow, defined as output less investment less government consumption, the greater will be the incentive for precautionary saving and, ceteris paribus, the larger the current account surplus. Empirical support for the model is found using post-war quarterly data for the United States, Japan, and the United Kingdom, as well as a long time series (1919-90) for the United States.