What Drives the Current Account in Commodity Exporting Countries? The Cases of Chile and New Zealand

Abstract

This paper uses an open economy DSGE model with a commodity sector and nominal and real rigidities to ask what factors account for current account developments in two small commodity exporting countries. We estimate the model, using Bayesian techniques, on Chilean and on New Zealand data, and investigate the structural factors that explain the behaviour of the two countries' current accounts. We find that foreign financial conditions, investment-specific shocks, and foreign demand account for the bulk of the variation of the current accounts of the two countries. In the case of New Zealand fluctuations in commodity export prices have also been important. Monetary and fiscal policy shocks (deviations from policy rules) are estimated to have relatively small effects on the current account. We find interesting differences in Chilean and New Zealand responses to some shocks, despite similarities between the two economies and the common structural model employed.

Keywords: current account, commodity price, small open economy, DSGE model

JEL Classification: E31, E32, F32, F41