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Relative price levels and current accounts: an exploration

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  • Aizenman, Joshua

Abstract

This paper studies the links between current accounts and relative price levels, finding that current account changes are associated with sizable future relative price levels effects. This is done in panel regressions of the Penn effect, adding a lagged current account/GDP and other explanatory variables. Higher GDP/capita and a greater export share of manufacturing tend to mitigate the real exchange rate impact of lagged current accounts. Active management of current accounts may provide a powerful adjustment channel, mitigating the real exchange rate effects of volatile terms of trade, and may explain the growing proliferation of Sovereign Wealth Funds.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt6w64k75x.

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Date of creation: 01 Nov 2008
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Handle: RePEc:cdl:ucscec:qt6w64k75x

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Keywords: Current account; Relative Price levels; Real Exchange rate; Sovereign Wealth Funds;

References

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  1. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5629, C.E.P.R. Discussion Papers.
  2. Lee,J. & Chinn,M.D., 2004. "Current account and real exchange rate dynamics in the G-7 countries," Working papers, Wisconsin Madison - Social Systems 11, Wisconsin Madison - Social Systems.
  3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  4. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 1-24, May.
  5. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, Elsevier, vol. 59(1), pages 47-76, January.
  6. Joshua Aizenman & Daniel Riera-Crichton, 2008. "Real Exchange Rate and International Reserves in an Era of Growing Financial and Trade Integration," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 90(4), pages 812-815, November.
  7. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers, National Bureau of Economic Research, Inc 10276, National Bureau of Economic Research, Inc.
  8. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, Elsevier, vol. 66(2), pages 75-89, September.
  9. Joshua Aizenman & Yothin Jinjarak, 2008. "The US as the "Demander of Last Resort" and its Implications on China's Current Account," NBER Working Papers, National Bureau of Economic Research, Inc 14453, National Bureau of Economic Research, Inc.
  10. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  11. Joshua Aizenman & Reuven Glick, 2007. "Sovereign wealth funds: stumbling blocks or stepping stones to financial globalization?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue dec14.
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Cited by:
  1. Aizenman, Joshua & Jinjarak, Yothin, 2008. "The US as the “demander of last resort†and its implications on China’s current account," Santa Cruz Department of Economics, Working Paper Series, Department of Economics, UC Santa Cruz qt986646mz, Department of Economics, UC Santa Cruz.
  2. Joshua Aizenman & Yothin Jinjarak, 2008. "The US as the "Demander of Last Resort" and its Implications on China's Current Account," NBER Working Papers, National Bureau of Economic Research, Inc 14453, National Bureau of Economic Research, Inc.
  3. Yin-Wong Cheung & Eiji Fujii, 2011. "Exchange Rate Misalingment Estimates - Sources of Differences," CESifo Working Paper Series, CESifo Group Munich 3555, CESifo Group Munich.

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