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What drives U.S. current account fluctuations?

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  • Barnett, Alina
  • Straub, Roland

Abstract

We use a structural VAR with sign restrictions to jointly identify the impact of monetary policy, private absorption, technology and oil price shocks on current account fluctuations in the U.S.. We derive the sign restrictions from theoretical impulse response functions of a DSGE model with oil, ensuring that these are consistent with a broad range of parameter values. We find that a contractionary oil price shock has a negative effect on the current account which lasts for approximately 3 years. We also find that monetary policy shocks and private absorption shocks are the main drivers of historical current account deteriorations in the U.S. Furthermore, monetary policy shocks can explain approximately 60 percent at a one year forecast horizon, although this reduces to around 40 per cent at a 7 year horizon, whilst the oil price explains just under 10 percent of the forecast error variance of the U.S. current account. JEL Classification: E0, F32, F4

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0959.

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Date of creation: Nov 2008
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Handle: RePEc:ecb:ecbwps:20080959

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Keywords: current account; global imbalances; sign restrictions;

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References

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  1. Canova, Fabio, 2003. "The Transmission of US Shocks to Latin America," CEPR Discussion Papers 3963, C.E.P.R. Discussion Papers.
  2. Blanchard, Olivier J & Galí, Jordi, 2008. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?," CEPR Discussion Papers 6631, C.E.P.R. Discussion Papers.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  4. Bems, Rudolfs & Dedola, Luca & Smets, Frank, 2007. "US imbalances: The role of technology and policy," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 523-545, June.
  5. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?," Working Papers 0711, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  6. Bilbiie, Florin Ovidiu & Straub, Roland, 2011. "Asset Market Participation, Monetary Policy Rules and the Great Inflation," CEPR Discussion Papers 8555, C.E.P.R. Discussion Papers.
  7. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
  8. Hans-Martin Krolzig & Michael P. Clements, 2002. "Can oil shocks explain asymmetries in the US Business Cycle?," Empirical Economics, Springer, vol. 27(2), pages 185-204.
  9. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2011. "Oil shocks and external adjustment," Journal of International Economics, Elsevier, vol. 83(2), pages 168-184, March.
  10. Benati, Luca & Surico, Paolo, 2008. "VAR analysis and the Great Moderation," Working Paper Series 0866, European Central Bank.
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Cited by:
  1. Kim, C., 2011. "Global balance and financial stability: twin objectives toward a resilient global economic system," Financial Stability Review, Banque de France, issue 15, pages 61-72, February.
  2. Fratzscher, Marcel & Saborowski, Christian & Straub, Roland, 2009. "Monetary Policy Shocks and Portfolio Choice," Working Paper Series 1122, European Central Bank.
  3. Tim Oliver Berg, 2013. "Cross-country evidence on the relation between stock prices and the current account," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2267-2277, June.
  4. Buetzer, Sascha & Habib, Maurizio Michael & Stracca, Livio, 2012. "Global exchange rate configurations: Do oil shocks matter?," Working Paper Series 1442, European Central Bank.

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