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The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies

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Author Info
Jaewoo Lee
Menzie D. Chinn

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Abstract

A sticky-price model is used to motivate a structural VAR analysis of the current account and the real exchange rate for seven major industrialized countries (the US, Canada, the UK, Japan, Germany, France and Italy). The analysis is distinguished from previous work in that it adopts minimal assumptions for identification. The empirical results are consistent with the theoretical model, as well as the sticky price intertemporal model of Obstfeld and Rogoff (1995). Permanent shocks to productivity have large long term effects on the real exchange rate, but relatively small effects on the current account; money shocks have large effects on the current account and exchange rate in the short run, but not on either variable in the long run.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6495.

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Date of creation: Apr 1998
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Handle: RePEc:nbr:nberwo:6495

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Urban, Dieter M., 2007. "Terms of Trade, Catch-up, and Home Market Effect: The Example of Japan," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Menzie David Chinn & Jaewoo Lee, 2002. "Current Account and Real Exchange Rate Dynamics in the G-7 Countries," IMF Working Papers 02/130, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Anton Muscatelli & Franco Spinelli & Carmine Trecroci, 2001. "Real Exchange Rates in the Long Run: Evidence from Historical Data," Working Papers 2001_6, Department of Economics, University of Glasgow. [Downloadable!]
  4. repec:att:wimass:1920411 is not listed on IDEAS
  5. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Massimo Giuliodori, . "The Empirical Relevance of a basic sticky-price intertemporal model," Working Papers 2001_17, Department of Economics, University of Glasgow. [Downloadable!]
  7. S. Holle & M. Demertzis, 2002. "External Wealth and the Trade Balance: A Time-Series Analysis for the Netherlands," WO Research Memoranda (discontinued) 716, Netherlands Central Bank, Research Department. [Downloadable!]
  8. Kristin Langwasser, 2009. "Global current account adjustment: trade implications for the euro area countries," International Economics and Economic Policy, Springer, vol. 6(2), pages 115-133, July. [Downloadable!] (restricted)
  9. Kanda Naknoi & Allan D. Brunner, 2003. "Trade Costs, Market Integration, and Macroeconomic Volatility," IMF Working Papers 03/54, International Monetary Fund. [Downloadable!]
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