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Asset prices and current account fluctuations in G7 economies

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  • Fratzscher, Marcel
  • Straub, Roland

Abstract

The paper analyses the effect of equity price shocks on current account positions for the G7 industrialized countries in 1974-2007. It uses a Bayesian VAR with sign restrictions for the identification of asset price shocks and to test empirically for their effect on current accounts. Such shocks are found to exert a sizeable effect, with a 10 percent equity price increase for instance in the United States relative to the rest of the world worsening the US trade balance by 0.9 percentage points after 16 quarters. However, the response of the trade balance to equity price shocks varies substantially across countries. The evidence suggests that the channels accounting for this heterogeneity function both through wealth effects on private consumption and to some extent through the real exchange rate of countries. JEL Classification: E2, F32, F40, G1

Suggested Citation

  • Fratzscher, Marcel & Straub, Roland, 2009. "Asset prices and current account fluctuations in G7 economies," Working Paper Series 1014, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20091014
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nils Holinski & Robert Vermeulen, 2012. "The international wealth channel: a global error-correcting analysis," Empirical Economics, Springer, pages 985-1010.
    2. Enders, Zeno & Müller, Gernot J. & Scholl, Almuth, 2011. "How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States," Journal of International Economics, Elsevier, pages 53-69.
    3. Holinski Nils & Vermeulen Robert, 2009. "The International Wealth Effect: A Global Error-Correcting Analysis," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Alexander Guschanski & Engelbert Stockhammer, 2017. "Are current accounts driven by competitiveness or asset prices? A synthetic model and an empirical test," Working Papers PKWP1716, Post Keynesian Economics Study Group (PKSG).
    5. Jiranyakul, Komain, 2016. "Asset Prices, Real Exchange Rate and Current Account Fluctuations: Some Structural VAR Evidence for Thailand," MPRA Paper 74901, University Library of Munich, Germany.
    6. Berg, Tim Oliver, 2010. "Exploring the international transmission of U.S. stock price movements," MPRA Paper 23977, University Library of Munich, Germany.
    7. Mthuli Ncube & Eliphas Ndou, 2013. "Working Paper 169 - Monetary Policy and Exchange Rate Shocks on South African Trade Balance," Working Paper Series 448, African Development Bank.
    8. Tim Oliver Berg, 2013. "Cross-country evidence on the relation between stock prices and the current account," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2267-2277, June.
    9. Nikolaychuk Sergiy & Shapovalenko Nadiia, 2013. "The identification of the sources of current account fluctuations in Ukraine," EERC Working Paper Series 13/12e, EERC Research Network, Russia and CIS.
    10. Nils Holinski & Robert Vermeulen, 2012. "The international wealth channel: a global error-correcting analysis," Empirical Economics, Springer, pages 985-1010.
    11. Kucukali, Serhat, 2016. "Risk scorecard concept in wind energy projects: An integrated approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 975-987.

    More about this item

    Keywords

    Asset Prices; Bayesian VAR; current account; financial markets; identification; industrialized economies;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G1 - Financial Economics - - General Financial Markets

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