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Current Account Dynamics: On Income and Trade Balance

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  • YOSHIDA Yushi
  • Weiyang ZHAI

Abstract

We investigate the dynamics of Japan's income and trade balance between 1996:Q1 and 2019:Q4 via a structural VAR model. The two most important constituents of the current account (trade balance and income balance) and seven other macroeconomic variables are entered in our VAR model. We implement a shadow rate for the measure of monetary policy under the unconventional monetary policy regime, including a zero lower bound interest rate. By using a standard SVAR model from the literature, we find that world shocks dominate and rule the dynamics of Japan's current account. Through additional short-run zero restrictions, we also find that exogenous exchange rate shocks affect the current account.

Suggested Citation

  • YOSHIDA Yushi & Weiyang ZHAI, 2021. "Current Account Dynamics: On Income and Trade Balance," Discussion papers 21077, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:21077
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