The dynamics among domestic saving, investment, and the current account balance in the USA: a long-run perspective

Abstract

We use time series methods to analyse the long- and short-run dynamics and inter-relationships between government savings, private savings, investment, and the current account balance in the USA for the period 1947Q1–2017Q3. We control for the impact of the nonlinear dynamics of GDP growth over the business cycle on the evolution of these variables. A few important results stand out. The relationships among the variables are time varying as we find three structural periods: (I) 1947Q1–1984Q3, (II) 1984Q4–1999Q4, and (III) 2000Q1–2017Q3. The impact of nonlinearities in GDP growth matters in each period, but the twin deficit hypothesis is supported only in the first period. Generally, we also find no evidence to conclude that the Ricardian equivalence hypothesis holds over the full sample period. Finally, we cannot conclude that the Feldstein–Horioka puzzle with respect to private or government savings holds over the three structural periods.