MACROECONOMIC UNCERTAINTY, PRECAUTIONARY SAVING, AND THE CURRENT ACCOUNT

The relationship between current account developments and changes in t he macroeconomic environment is a key issue in open economy macroecono mics. This paper extends the standard intertemporal model of the curre nt 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 governm ent consumption, the greater will be the incentive for precautionary s aving and, ceteris paribus, the larger the current account surplus. Em pirical support for the model is found using post-war quarterly data f or the United States, Japan, and the United Kingdom, as well as a long time series (1919-90) for the United States.