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The current account and monetary policy in the euro area

Author

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  • Schuler, Tobias
  • Sun, Yiqiao

Abstract

We investigate the factors driving current account and monetary policy developments in the euro area. We estimate an open-economy structural vector autoregression (VAR) model with zero and sign restrictions derived from a multi-country dynamic stochastic general equilibrium (DSGE) model to identify relevant shocks and analyse their impact on the current account and interest rate. Examining the VAR impulse responses for Germany, Italy and Spain we find that investment shocks and preference shocks drive the current account and interest rates in the opposite directions. By contrast, external demand shocks and productivity shocks cause both the current account balance and interest rate to move in the same direction. We also provide evidence for spillovers to the euro area from US preference shocks and US interest rate policy shocks. JEL Classification: E32, F32, F45

Suggested Citation

  • Schuler, Tobias & Sun, Yiqiao, 2022. "The current account and monetary policy in the euro area," Working Paper Series 2696, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222696
    Note: 2759141
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    current account; macroeconomic shocks; monetary policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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