The current account, supply shocks and accommodative fiscal policy: interpretations of Swedish post-war data

Peter Englund and Anders Vredin
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Peter Englund: Uppsala University
Anders Vredin: Trade Union Institution for Economic Research, Sweden

Finnish Economic Papers, 1990, vol. 3, issue 2, 89-107

Abstract: The aim of the paper is to assess empirically the importance of different types of shocks in explaining the Swedish current account. We do this by first estimating an unrestricted vector autoregression system in these four variables: the real wage, the terms of trade, government consumption, and the current account. We then perform innovation accounting and impulse response studies based on a particular structural model with labour-union determined wages and government consumption taken to be accommodative in response to private sector labour demand. A principal finding is that the forecast error variance in the current account is to a very limited extent (less than 20 per cent over a couple of years) explained by innovations to the wage, terms-of-trade, or government-consumption equations. This is in contrast with the »conventional wisdom» and also with the results for some of the other variables. For example, innovations in the terms-of-trade equation explain more than half of the variance of the wage.

Date: 1990
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