Demand shocks and trade balance dynamics

José García Solanes (), Jesús Rodríguez and Jose L. Torres ()
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Jesús Rodríguez: Universidad Pablo de Olavide

No 07-04, Working Papers from Spanish Chapter of the International Economics and Finance Society

Abstract: This paper studies the current account dynamics in the G-7 countries plus Spain. We estimate a SVAR model which allows us to identify three different shocks: supply shocks, real demand shocks and nominal shocks. We use a different identification procedure from previous work based on a microfounded stochastic open-economy model in which the real exchange rate is a determinant of the Phillips curve. Estimates from a structural VAR show that real demand shocks explain most of the variability of current account imbalances, whereas, contrary to previous findings, nominal shocks play no role. The results we obtain are consistent with the predictions of a widely set of open-economy models and illustrate that demand policies are the main responsible of trade imbalances.

Keywords: Current account; SVAR (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-int
Date: 2007-06

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Related works:
Working Paper: Demand Shocks and Trade Balance Dynamics (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:aee:wpaper:0704

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