The Role of Savings and Investment in Balancing the Current Account: Some Empirical Evidence from the United States
Current account deficits ultimately reflect a disparity between a country's national savings and investment. As such, the issue of how current account balance is achieved in practice can be viewed in terms of whether it is savings or investment that adjusts to an external deficit. In this article, the author examines empirically how savings and investment have responded to current account imbalances in the United States over the past 40 years. The main finding is that, on average, investment was largely responsible for rebalancing the current account in the long run. The finding that investment has borne the largest fraction of the external adjustment conforms with the view that, in the long run, the national savings rate constrains a country's rate of investment. Thus, in a situation with outstanding net external debt, low levels of national savings ultimately imply low levels of domestic investment. To the extent that one views net additions of capital as essential for a country's future growth prospects, low savings may signify a reduction in future standards of living.
About the Authors
Giovanni P. Olivei,
Federal Reserve Bank of Boston
Giovanni Olivei is a senior vice president and interim director of research at the Federal Reserve Bank of Boston.
Email: Giovanni.Olivei@bos.frb.org
Resources
Related Content
New England Study Group Past Meetings
The Effects of Government Spending on Real Exchange Rates: Evidence from Military Spending Panel Data
Household Formation over Time: Evidence from Two Cohorts of Young Adults
Consumer Behavior and Payment Choice