Current Account and Real Exchange Rate Dynamics in the G-7 Countries

23 Pages Posted: 2 Feb 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)

Date Written: August 2002

Abstract

The canonical predictions of intertemporal open-economy macro models are tested by a structural VAR analysis of Group of Seven countries. The analysis is distinguished from the previous literature in that it adopts minimal assumptions for identification. Consistent with a large set of theoretical models, permanent shocks have large long-term effects on the real exchange rate but relatively small effects on the current account; temporary shocks have large effects on the current account and exchange rate in the short run, but not on either variable in the long run. The signs of some impulse responses point toward models that differentiate tradables and nontradables.

Keywords: real exchange rate, current account, intertemporal models, permanent and temporary shocks

JEL Classification: F31, F41

Suggested Citation

Lee, Jaewoo and Chinn, Menzie David, Current Account and Real Exchange Rate Dynamics in the G-7 Countries (August 2002). IMF Working Paper, Vol. , pp. 1-23, 2002. Available at SSRN: https://ssrn.com/abstract=879902

Jaewoo Lee (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States
202-623-7331 (Phone)
202-623-6334 (Fax)

Menzie David Chinn

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

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-262-7397 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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