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Demand shocks and trade balance dynamics

  • José García-Solanes

    (Universidad de Murcia)

  • Jesús Rodríguez

    (Universidad Pablo de Olavide)

  • José L. Torres

    (Universidad de Málaga)

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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Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 07-04.

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Length: 35 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:aee:wpaper:0704
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