Asset prices and current account fluctuations in G7 economies

Marcel Fratzscher and Roland Straub

No 1014, Working Paper Series from European Central Bank

Abstract: The paper analyses the effect of equity price shocks on current account positions for the G7 industrialized countries in 1974-2007. It uses a Bayesian VAR with sign restrictions for the identification of asset price shocks and to test empirically for their effect on current accounts. Such shocks are found to exert a sizeable effect, with a 10 percent equity price increase for instance in the United States relative to the rest of the world worsening the US trade balance by 0.9 percentage points after 16 quarters. However, the response of the trade balance to equity price shocks varies substantially across countries. The evidence suggests that the channels accounting for this heterogeneity function both through wealth effects on private consumption and to some extent through the real exchange rate of countries. JEL Classification: E2, F32, F40, G1

Keywords: Asset Prices; Bayesian VAR; current account; financial markets; identification; industrialized economies (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
Note: 335955
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Asset Prices and Current Account Fluctuations in G-7 Economies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091014

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