Monetary policy and the current account; theory and evidence

Ida Hjortsoe, Martin Weale () and Tomasz Wieladek

No 45, Discussion Papers from Monetary Policy Committee Unit, Bank of England

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 1976 Q1–2006 Q4 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: Balance of payments; current account; Bayesian panel VAR; economic liberalisation; monetary policy (search for similar items in EconPapers)
JEL-codes: C11 C23 E52 F32 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2016-03-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Monetary Policy and the Current Account: Theory and Evidence (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:mpc:wpaper:0045

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