Current Account Dynamics and the Real Exchange Rate: Disentangling the Evidence

We study the main shocks driving current account fluctuations for the G6 economies. Our

designed to uncover the role of permanent and temporary output shocks and the relation between the

rate, net output, the real exchange rate, and the current account and identify four structural shocks.

intertemporal model with time-varying interest rate, since both external supply and preference shocks

account for a large proportion of current account fluctuations, but the excess response of the current

literature that a shock that explains little about net output changes can explain a large proportion of

current account and the real exchange rate, which explains why is it difficult to find a simple

statistical relationship between these two variables.