What Drives US Current Account Fluctuations?

34 Pages Posted: 29 Nov 2008

See all articles by Alina Barnett

Alina Barnett

University of Warwick

Roland Straub

European Central Bank (ECB)

Date Written: November 26, 2008

Abstract

We use a structural VAR with sign restrictions to jointly identify the impact of monetary policy, private absorption, technology and oil price shocks on current account fluctuations in the U.S.. We derive the sign restrictions from theoretical impulse response functions of a DSGE model with oil, ensuring that these are consistent with a broad range of parameter values. We find that a contractionary oil price shock has a negative effect on the current account which lasts for approximately 3 years. We also find that monetary policy shocks and private absorption shocks are the main drivers of historical current account deteriorations in the U.S. Furthermore, monetary policy shocks can explain approximately 60 percent at a one year forecast horizon, although this reduces to around 40 per cent at a 7 year horizon, whilst the oil price explains just under 10 percent of the forecast error variance of the U.S. current account.

Keywords: Current Account, Global Imbalances, Sign Restrictions

JEL Classification: E0, F32, F4

Suggested Citation

Barnett, Alina and Straub, Roland, What Drives US Current Account Fluctuations? (November 26, 2008). ECB Working Paper No. 959, Available at SSRN: https://ssrn.com/abstract=1291167 or http://dx.doi.org/10.2139/ssrn.1291167

Alina Barnett

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Roland Straub (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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