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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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  • José García-Solanes & Jesús Rodríguez-López & José Torres, 2011. "Demand Shocks and Trade Balance Dynamics," Open Economies Review, Springer, vol. 22(4), pages 739-766, September.
    • Handle: RePEc:kap:openec:v:22:y:2011:i:4:p:739-766
    DOI: 10.1007/s11079-010-9171-3
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    Cited by:

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    3. Kumar, Abhishek & Mallick, Sushanta & Sinha, Apra, 2024. "Fiscal spillover in emerging economies: Real versus financial channels," Journal of International Money and Finance, Elsevier, vol. 149(C).

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    More about this item

    Keywords

    Trade balance; SVAR; F3;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance

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