Determinants of the current account balance in the United States

Abstract

This article studies the role of public and private imbalances in the behaviour of the current account balance in the United States in the context of an intertemporal model. The estimation evaluates the effects of public and private imbalances on the dynamics of the current account. Correlation coefficients support the Ricardian equivalence. Higher budget deficit correlates with a reduction in private consumption and an increase in private savings. Government saving does not vary significantly with macroeconomic variables in the short- or in the long-run. In contrast, fluctuations in government investment vary significantly with a number of economic variables in the long- and in the short-run. Accordingly, fluctuations in the budget deficit are likely to be driven by fluctuations in public investment. In contrast to government savings, private savings vary significantly with macro variables in the long- and in the short-run. Fluctuations in private investment appear less evident compared to that in private savings. Overall, fluctuations in the current account balance appear to be more tied to movements in the budget deficit. Nonetheless, fluctuations in the budget deficit are moderated by an increase in private savings and a reduction in private investment, moderating fluctuations in the current account balance.