Macroeconomic volatility and the current account: Extending the evidence

Current account imbalances and macroeconomic volatility are two of the most pressing challenges in the global economy. Using an updated and extended data set, our contribution is to show that the relationship between the two is considerably more complex than hitherto thought and that it cannot be properly understood without allowing for country heterogeneity. In particular, over the full estimation period (1970–2020) or the pre-GFC period, increased volatility improves the current account in advanced, but not in developing, economies. Post-GFC, early evidence suggests that the relationship has been reversed, so that volatility is associated with improvements in the current account balance in developing, but not in advanced, economies. When we explore potential mechanisms for these asymmetries, we find that the biggest differences are in the behavior of exports and the real exchange rate.