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

Bussiere, Matthieu, Aikaterini, Karadimitropoulou, Leon-Ledesma, Miguel A. (2018) Current Account Dynamics and the Real Exchange Rate: Disentangling the Evidence. Macroeconomic Dynamics, . ISSN 1365-1005. (doi:10.1017/S1365100518000561)

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We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to find a simple statistical relationship between these two variables.

Item Type: Article
DOI/Identification number: 10.1017/S1365100518000561
Uncontrolled keywords: Current account, real exchange rate, two-good intertemporal model, SVAR
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Miguel Leon-Ledesma
Date Deposited: 10 Jul 2018 12:24 UTC
Last Modified: 29 May 2019 20:42 UTC
Resource URI: (The current URI for this page, for reference purposes)
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