Current Account and Real Exchange Rate Dynamics in the G-7 Countries
23 Pages Posted: 2 Feb 2006
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: Suggested Citation
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