The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies

28 Pages Posted: 25 May 2006

See all articles by Jaewoo Lee

Jaewoo Lee

International Monetary Fund (IMF) - Research Department

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: April 1998

Abstract

A sticky-price model is used to motivate a structural VAR analysis of the current account and the real exchange rate for seven major industrialized countries (the US, Canada, the UK, 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.

Suggested Citation

Lee, Jaewoo and Chinn, Menzie David, The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies (April 1998). NBER Working Paper No. w6495. Available at SSRN: https://ssrn.com/abstract=226239

Jaewoo Lee (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

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Madison, WI 53706-1393
United States
608-262-7397 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

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