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CURRENT ACCOUNT DYNAMICS AND THE REAL EXCHANGE RATE: DISENTANGLING THE EVIDENCE

Published online by Cambridge University Press:  22 November 2018

Matthieu Bussière
Affiliation:
Banque de France
Aikaterini E. Karadimitropoulou*
Affiliation:
Bank of Greece and University of East Anglia
Miguel A. León-Ledesma
Affiliation:
University of Kent
*
Address correspondence to: Aikaterini Karadimitropoulou, Department of Economic Analysis and Research, Bank of Greece, 21, E. Venizelos Ave., 102 50, Athens, Greece; e-mail: AKaradimitropoulou@bankofgreece.gr. Phone: +30 210 320 2346. Fax: +30 210 323 3025.

Abstract

We study the main shocks driving current account (CA) fluctuations for the G6 economies, using a standard two-good intertemporal model. We build a structural vector autoregression model including the world real interest rate, net output (NO), the real exchange rate, and the CA 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 CA fluctuations; (ii) temporary domestic shocks account for a large proportion of CA fluctuations, albeit smaller than in previous studies; (iii) our results alleviate the puzzle in the literature that a shock that explains little about NO changes can explain a large proportion of CA changes; (iv) the nature of the shock matters to shape the relationship between the CA and the real exchange rate.

Type
Articles
Copyright
© Cambridge University Press 2018

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Footnotes

We would like to thank participants at the 3rd HenU/INFER Workshop on Applied Macroeconomics for their comments. We would also like to thank Harald Uhlig, Shaun Hargreaves-Heap, and an anonymous referee for their useful suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Banque de France, Bank of Greece, or the Eurosystem.

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