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The International Wealth Channel: A Global Error-Correcting Analysis

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  • Nils Holinski
  • Robert Vermeulen

    () (CREA, University of Luxembourg)

Abstract

This paper analyzes the empirical link between asset prices, consumption and the trade balance using a global macroeconometric model developed by Pesaran, Schuermann, and Weiner (2004). The model is estimated for 29 countries with quarterly data over the period 1981Q1 - 2006Q4. Motivated by increasing international _nancial and real integration, and pronounced cycles in stock and housing prices, we employ generalized impulse response functions for a group of _ve of the world's most industrialized countries and show that shocks to asset prices transmit into the trade balance. We refer to this transmission channel as the international wealth channel and _nd it to be present in the US, UK and, to a lesser extent, in France, but absent in Japan and Germany. More speci_cally, when we _nd the international wealth channel at work as stock price changes are transmitted through consumption into the trade balance, whereas housing price changes are transmitted through investment into the trade balance.

Suggested Citation

  • Nils Holinski & Robert Vermeulen, 2010. "The International Wealth Channel: A Global Error-Correcting Analysis," CREA Discussion Paper Series 10-04, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:10-04
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    Cited by:

    1. Holinski Nils & Kool Clemens & Muysken Joan, 2009. "International Portfolio Balance – Modeling the External Adjustment Process," Research Memorandum 033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    2. Karsten Staehr & Robert Vermeulen, 2016. "How competitiveness shocks affect macroeconomic performance across euro area countries," DNB Working Papers 515, Netherlands Central Bank, Research Department.
    3. Bettendorf, Timo, 2017. "Investigating Global Imbalances: Empirical evidence from a GVAR approach," Economic Modelling, Elsevier, vol. 64(C), pages 201-210.
    4. Anupam Nanda & Jia-Huey Yeh, 2016. "International Transmission Mechanisms and Contagion in Housing Markets," The World Economy, Wiley Blackwell, vol. 39(7), pages 1005-1024, July.

    More about this item

    Keywords

    trade balance; wealth effect; global imbalances; GVAR; international transmission;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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