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The current account, supply shocks and accommodative fiscal policy : interpretations of Swedish post-war data

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  • Peter Englund

    (Uppsala University)

  • Anders Vredin

    (Trade Union Institution for Economic Research, Sweden)

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    Abstract

    The aim of the paper is to assess empirically the importance of different types of shocks in explaining the Swedish current account. We do this by first estimating an unrestricted vector autoregression system in these four variables: the real wage, the terms of trade, government consumption, and the current account. We then perform innovation accounting and impulse response studies based on a particular structural model with labour-union determined wages and government consumption taken to be accommodative in response to private sector labour demand. A principal finding is that the forecast error variance in the current account is to a very limited extent (less than 20 per cent over a couple of years) explained by innovations to the wage, terms-of-trade, or government-consumption equations. This is in contrast with the »conventional wisdom» and also with the results for some of the other variables. For example, innovations in the terms-of-trade equation explain more than half of the variance of the wage.

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    Bibliographic Info

    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 3 (1990)
    Issue (Month): 2 (Autumn)
    Pages: 89-107

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    Handle: RePEc:fep:journl:v:3:y:1990:i:2:p:89-107

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    1. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
    2. Richard H. Clarida, 1986. "International Lending and Borrowing in a Stochastic Sequence Equilibrium," NBER Working Papers 1944, National Bureau of Economic Research, Inc.
    3. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    4. Olivier J. Blanchard & Mark W. Watson, 1987. "Are Business Cycles All Alike?," NBER Working Papers 1392, National Bureau of Economic Research, Inc.
    5. Svensson, Lars E O, 1984. "Oil Prices, Welfare, and the Trade Balance," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 649-72, November.
    6. Calmfors, Lars & Horn, Henrik, 1986. "Employment Policies and Centralized Wage-Setting," Economica, London School of Economics and Political Science, vol. 53(211), pages 281-302, August.
    7. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
    8. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
    9. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
    10. Torsten Persson & Lars E.O. Svensson, 1983. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," NBER Working Papers 1129, National Bureau of Economic Research, Inc.
    11. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 147-59.
    12. Richard H. Clarida, 1986. "The Balance of Payments Adjustment Mechanism in a Rational Expectations Equilibrium," NBER Working Papers 1945, National Bureau of Economic Research, Inc.
    13. Lundberg, Erik, 1985. "The Rise and Fall of the Swedish Model," Journal of Economic Literature, American Economic Association, vol. 23(1), pages 1-36, March.
    14. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    15. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    16. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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