Asset Prices, Exchange Rates and the Current Account

48 Pages Posted: 10 Aug 2007

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Luciana Juvenal

University of Warwick - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 2007

Abstract

This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 32% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been much less relevant, explaining less than 7% and exerting a more temporary effect on the US trade balance. Our findings suggest that sizeable exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a more potent source of adjustment.

Keywords: current account, global imbalances, exchange rates, Bayesian VAR, sign restrictions

JEL Classification: F32, F40, C30

Suggested Citation

Fratzscher, Marcel and Sarno, Lucio and Juvenal, Luciana, Asset Prices, Exchange Rates and the Current Account (August 2007). ECB Working Paper No. 790. Available at SSRN: https://ssrn.com/abstract=1003965

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lucio Sarno

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luciana Juvenal

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

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