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Cross-country evidence on the relation between stock prices and the current account

  • Berg, Tim Oliver

This paper explores the relation between stock prices and the current account for 17 OECD countries in 1980-2007. I use a panel vector autoregression (VAR) to compare the effects of stock price shocks to those originating from monetary policy and exchange rates. While monetary policy shocks have little effects, shocks to stock prices and exchange rates have sizeable effects. A 10% contraction in stock prices improves the current account by 0.3% after two years. Hence I find a channel, in addition to the traditional exchange rate channel, through which external balance for an OECD country with a current account imbalance can be restored.

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File URL: http://mpra.ub.uni-muenchen.de/23976/1/MPRA_paper_23976.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23976.

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Date of creation: 19 May 2010
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Handle: RePEc:pra:mprapa:23976
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  1. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2010. "Asset prices, exchange rates and the current account," European Economic Review, Elsevier, vol. 54(5), pages 643-658, July.
  2. Aart Kraay & Jaume Ventura, 2005. "The Dot-Com Bubble, the Busch Deficits and the US Current Account," Working Papers 216, Barcelona Graduate School of Economics.
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  7. Dees, S. & di Mauro, F. & Pesaran, M.H. & Smith, L.V., 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Cambridge Working Papers in Economics 0518, Faculty of Economics, University of Cambridge.
  8. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  9. Fratzscher, Marcel & Straub, Roland, 2009. "Asset prices and current account fluctuations in G7 economies," Working Paper Series 1014, European Central Bank.
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  11. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
  12. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
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  14. Bems, Rudolfs & Dedola, Luca & Smets, Frank, 2007. "US imbalances: the role of technology and policy," Working Paper Series 0719, European Central Bank.
  15. Barnett, Alina & Straub, Roland, 2008. "What drives U.S. current account fluctuations?," Working Paper Series 0959, European Central Bank.
  16. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
  17. Swamy, P A V B, 1970. "Efficient Inference in a Random Coefficient Regression Model," Econometrica, Econometric Society, vol. 38(2), pages 311-23, March.
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