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The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies

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  • Jaewoo Lee
  • Menzie D. Chinn

Abstract

A sticky-price model is used to motivate a structural VAR analysis of the current account and the real exchange rate for seven major industrialized countries (the US, Canada, the UK, Japan, Germany, France and Italy). The analysis is distinguished from previous work in that it adopts minimal assumptions for identification. The empirical results are consistent with the theoretical model, as well as the sticky price intertemporal model of Obstfeld and Rogoff (1995). Permanent shocks to productivity have large long term effects on the real exchange rate, but relatively small effects on the current account; money shocks have large effects on the current account and exchange rate in the short run, but not on either variable in the long run.

Suggested Citation

  • Jaewoo Lee & Menzie D. Chinn, 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," NBER Working Papers 6495, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6495
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. repec:wsi:wschap:9789813148543_0001 is not listed on IDEAS
    3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1997. "Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles," NBER Working Papers 5876, National Bureau of Economic Research, Inc.
    4. Edison, Hali J. & Pauls, B. Dianne, 1993. "A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 165-187, April.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    6. Martin D. D. Evans & James R. Lothian, 2017. "The Response of Exchange Rates to Permanent and Transitory Shocks under Floating Exchange Rates," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 1, pages 3-38 World Scientific Publishing Co. Pte. Ltd..
    7. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November.
    8. Ahmed, Shaghil, 1987. "Government spending, the balance of trade and the terms of trade in British history," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 195-220, September.
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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