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Demand Shocks and Trade Balance Dynamics

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  • José García-Solanes

    ()

  • Jesús Rodríguez-López

    ()

  • José Torres

    ()

Abstract

This paper studies the current account dynamics in the G-7 countries plus Spain. We estimate a SVAR model which allows us to identify three different shocks: supply shocks, real demand shocks and nominal shocks. We use a different identification procedure from previous work based on a microfounded stochastic open-economy model in which the real exchange rate is a determinant of the Phillips curve. Estimates from a structural VAR show that real demand shocks explain most of the variability of current account imbalances, whereas, contrary to previous findings, nominal shocks play no role. The results we obtain are consistent with the predictions of a widely set of open-economy models and illustrate that demand policies are the main responsible of trade imbalances.

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 22 (2011)
Issue (Month): 4 (September)
Pages: 739-766

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Handle: RePEc:kap:openec:v:22:y:2011:i:4:p:739-766

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Trade balance; SVAR; F3;

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Cited by:
  1. Nikolaychuk Sergiy & Shapovalenko Nadiia, 2013. "The identification of the sources of current account fluctuations in Ukraine," EERC Working Paper Series 13/12e, EERC Research Network, Russia and CIS.

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