Asset Prices and Current Account Fluctuations in G7 Economies

38 Pages Posted: 6 Mar 2009

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Roland Straub

European Central Bank (ECB)

Date Written: February 27, 2009

Abstract

The paper analyses the effect of equity price shocks on current account positions for the G7 industrialized countries in 1974-2007. It uses a Bayesian VAR with sign restrictions for the identification of asset price shocks and to test empirically for their effect on current accounts. Such shocks are found to exert a sizeable effect, with a 10 percent equity price increase for instance in the United States relative to the rest of the world worsening the US trade balance by 0.9 percentage points after 16 quarters. However, the response of the trade balance to equity price shocks varies substantially across countries. The evidence suggests that the channels accounting for this heterogeneity function both through wealth effects on private consumption and to some extent through the real exchange rate of countries.

Keywords: asset prices, current account, identification, Bayesian VAR, financial markets, industrialized economies

JEL Classification: E2, F32, F40, G1

Suggested Citation

Fratzscher, Marcel and Straub, Roland, Asset Prices and Current Account Fluctuations in G7 Economies (February 27, 2009). ECB Working Paper No. 1014, Available at SSRN: https://ssrn.com/abstract=1333574 or http://dx.doi.org/10.2139/ssrn.1333574

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Roland Straub

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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