Current Account Dynamics and the Real Exchange Rate: Disentangling the Evidence

Bussiere, Matthieu, Karadimitropoulou, Aikaterini and León-Ledesma, Miguel A. (2018) Current Account Dynamics and the Real Exchange Rate: Disentangling the Evidence. Macroeconomic Dynamics. ISSN 1365-1005

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    Abstract

    We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to find a simple statistical relationship between these two variables.

    Item Type: Article
    Uncontrolled Keywords: current account,real exchange rate,two-good intertemporal model,svar
    Faculty \ School: Faculty of Social Sciences > School of Economics
    Depositing User: LivePure Connector
    Date Deposited: 24 Jul 2018 14:33
    Last Modified: 09 Feb 2019 01:08
    URI: https://ueaeprints.uea.ac.uk/id/eprint/67840
    DOI: 10.1017/S1365100518000561

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