The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies
UCSC Department of Economics Working Paper No. 395
Posted: 8 Oct 1998
Date Written: June 1998
A sticky-price model is used to motivate a structural VAR analysis of the current account the and the real exchange rate for seven major industrialized countries (the U.S., Canada, the U.K., Japan, Germany, France, and Italy). The analysis is distinguished from previous work in that it adopts minimal assumptions for identification. The empirical results are consistent with the theoretical model, as well as the sticky price intertemporal model of Obstfeld and Rogoff (1995). Permanent shocks to productivity have large long-term effects on the real exchange rate but relatively small effects on the current account; money shocks have large effects on the current account and exchange rate in the short run but not on either variable in the long run.
JEL Classification: F31, F41
Suggested Citation: Suggested Citation