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Asset Prices, News Shocks, and the Trade Balance

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  • MARCEL FRATZSCHER
  • ROLAND STRAUB

Abstract

We analyze the relationship between asset prices and the trade balance estimating a Bayesian VAR for a broad set of 38 industrialized and emerging market countries. To derive model‐based identifying restrictions, we model asset price shocks as news shocks about future productivity in a two‐country dynamic stochastic general equilibrium model. Such shocks are found to exert sizable effects on the trade balance. Moreover, the effects are highly heterogeneous across countries. For instance, following a news shock that implies on impact a 10% increase in domestic equity prices relative to the rest of the world, the U.S. trade balance will worsen by up to 1.0 percentage points, but much less so for most other economies. We find that this heterogeneity appears to be linked to the financial market depth and equity home bias of countries. Moreover, the channels via wealth effects and via the real exchange rate are important for understanding the heterogeneity in the transmission.
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Suggested Citation

  • Marcel Fratzscher & Roland Straub, 2013. "Asset Prices, News Shocks, and the Trade Balance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1211-1251, October.
    • Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:7:p:1211-1251
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    Cited by:

    1. Pedro Gete, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas.
    2. Vasiliki Chatzikonstanti & Michail Karoglou, 2022. "Can black swans be tamed with a flexible mean‐variance specification?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3202-3227, July.
    3. Deokwoo Nam & Jian Wang, 2019. "Mood Swings and Business Cycles: Evidence from Sign Restrictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1623-1649, September.
    4. Eduard Gaar & David Scherer & Dirk Schiereck, 2022. "The home bias and the local bias: A survey," Management Review Quarterly, Springer, vol. 72(1), pages 21-57, February.
    5. Ansgar Belke & Steffen Elstner & Svetlana Rujin, 2022. "Growth Prospects and the Trade Balance in Advanced Economies," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(5), pages 1209-1234, October.
    6. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    7. Kamber, Güneş & Theodoridis, Konstantinos & Thoenissen, Christoph, 2017. "News-driven business cycles in small open economies," Journal of International Economics, Elsevier, vol. 105(C), pages 77-89.
    8. Komain Jiranyakul, 2017. "Asset Prices, Real Exchange Rate and Current Account Fluctuations: Some Structural VAR Evidence for Thailand," Business and Economic Research, Macrothink Institute, vol. 7(2), pages 163-177, December.
    9. Pedro Gete, 2015. "Discussion of Sá and Wieladek," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 257-260, March.
    10. Bian, Timothy Yang & Gete, Pedro, 2015. "What drives housing dynamics in China? A sign restrictions VAR approach," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 96-112.
    11. Irina-Marilena, Ban, 2022. "Introducing house prices to the intertemporal current account model: An application to the European Union," Economic Modelling, Elsevier, vol. 117(C).
    12. Baumeister, Christiane & Hamilton, James D., 2021. "Reprint: Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 114(C).

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