Monetary Policy and the Current Account: Theory and Evidence

Tomasz Wieladek, Hjortsø, Ida and Martin Weale ()
Authors registered in the RePEc Author Service: Ida Hjortsoe

No 11204, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Does the current account improve or deteriorate following a monetary policy expansion? We examine this issue theoretically and empirically. We show that a standard open economy DSGE model predicts that the current account response to a monetary policy shock depends on the degree of economic regulation in different markets. In particular, financial (product market) liberalisation makes it more likely that the current account deteriorates (improves) following a monetary expansion. We test these theoretical predictions with a varying coefficient Bayesian panel VAR model, where the coefficients are allowed to vary as a function of the degree of financial, product and labour market regulation on data from 1976Q1-2006Q4 for 19 OECD countries. Our empirical results support the theory. We therefore conclude that following a monetary policy expansion, the current account is more likely to go into deficit (surplus) in countries with more liberalised financial (product) markets.

Keywords: E52; Balance of payments; Bayesian panel var; Economic liberalisation; Monetary policy. jel classification: f32; Current account (search for similar items in EconPapers)
JEL-codes: C11 C23 E52 F32 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Monetary policy and the current account; theory and evidence (2016)
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