Abstract
We re‐examine the determinants of current account balances (CAB) and the saving-investment nexus with a focus on emerging markets and developing economies (EMDEs). A great deal of analyses have been made to shed more light on the behavior of CAB. However, we are in a new age in terms of facing not just economic challenges but also other non-economic challenges such as global climate changes, increasing natural disasters, and wars. We face the need to reexamine the determinants of CAB along with national saving and investment. We first take an event study approach, examining how these variables have evolved historically in the wake of wars, natural disasters, and pandemics. The second is a cross‐country panel investigation of CAB, national saving, and of investment. In the presence of global financial instability, EMDEs tend to experience an improvement in CAB and a rise in national saving. A rise in oil prices will increase investment but worsen the CAB. Contractionary monetary policy by the U.S. Federal Reserve Board tends to cause EMDE to lower national saving and thereby worsen CAB. The more frequently a country experiences wars, on average, its CAB tends to improve. When a climatological disaster happens, its CAB and national tends to improve. Geophysical disasters can have significantly positive impacts on all three of CAB, national saving, and investment. A currency crisis is accompanied by a slowdown in the economy, which may decrease spending but increase savings.
Information
- Series: La Follette School Working Paper No. 2024-003
- Authors: Menzie D. Chinn, Hiro Ito