Determinants of Current Account Dynamics: Simulation and Estimation of DSGE Models with a Bayesian Approach

This research analyzes the dynamics of the current account and its main components — particularly the trade balance and primary income — by identifying the key determinants of their fluctuations and evaluating the relative importance of the associated shocks. The study combines theoretical and empirical approaches, using Peru as a case of study, to exploit macroeconomic data within a structural framework. On the theoretical side, a DSGE model for a small open economy is developed, featuring three productive sectors: exportables, importables, and non-tradables. Production relies on domestic inputs, foreign capital, and imported intermediate goods, allowing external shocks to propagate to domestic activity. The baseline specification, inspired by Mendoza (1995), includes shocks to sectoral productivity and export prices, and is extended to incorporate shocks to imported input prices, international interest rates, and foreign investment returns. Empirically, the paper successfully replicates the persistence of the terms of trade and the countercyclicality of the current account without compromising business cycle characteristics, which the model also manages to reproduce. Parameters are estimated using Bayesian methods, and alternative specifications are compared to assess the contribution of each mechanism to explaining current account dynamics.