EXPORT INSTABILITY AND THE EXTERNAL BALANCE IN DEVELOPING-COUNTRIES

Uncertainty about the export earnings accruing to a country (sometimes referred to as export instability) is an important source of macroeco nomic uncertainty in many developing countries. Theory predicts that c ountries should react to increases in this form of uncertainty by incr easing their level of savings. The resulting asset accumulations would then act as the country's insurance against the greater riskiness in its income stream. This paper tests this implication for a large sampl e of developing countries. In general, the results suggest that develo ping countries have indeed responded to increases in export instabilit y by building up precautionary savings balances.