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What Drives the Current Account in Comodity Exporting Countries? The Cases of Chile and New Zealand

In: Current Account and External Financing

  • Juan Pablo Medina

    (Banco Central de Chile)

  • Anella Munro

    (Bank for International Settlements)

  • Claudio Soto

    (Banco Central de Chile)

This paper uses an open economy DSGE model with a commodity sector and nominal and real rigidities to ask what factors account for current account developments in two small commodity exporting countries. We estimate the model, using Bayesian techniques, on Chilean and on New Zealand data, and investigate the structural factors that explain the behaviour of the two countries’ current accounts. We find that foreign financial conditions, investment-specific shocks, and foreign demand shocks account for the bulk of the variation of the current accounts of the two countries. In the case of New Zealand, fluctuations in commodity export prices have also been important. Counterfactual experiments indicate that (i) a peso denomination of the Chilean external debt would reduce the impact of external shocks on the exchange rate and domestic variables, and the influence of monetary policy on the current account; and (ii) more or less aggressive monetary policy in New Zealand offers little scope for stabilizing the exchange rate and the current account.

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This chapter was published in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Current Account and External Financing, , chapter 10, pages 369-434, 2008.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v12c10pp369-434.
Handle: RePEc:chb:bcchsb:v12c10pp369-434
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