Asset Prices, Exchange Rates and the Current Account

By Marcel Fratzscher, Luciana Juvenal, Lucio Sarno. Social Science Research Network, 2007

190 citations recorded by the source corpus.

This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 30% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been less relevant, explaining about 9% and exerting a more temporary effect on the US trade balance. Our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a potent source of adjustment.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f4317b518c1f9f9fafd4a71cb0a32fe40b2b9f24

How researchers see this paper

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In Economics and Econometrics

1. F. Bagliano
2. Michael J. Hume
3. Claudio Morana
4. A. Sentance
5. O. Efimova
6. Apostolos Serletis

In Finance

1. F. Bagliano
2. Michael J. Hume
3. Claudio Morana
4. A. Sentance
5. Apostolos Serletis
6. O. Efimova

Citations in the corpus

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• The Great Recession: US dynamics and spillovers to the world economy (2012, background): “D  () as in (5), the block of equations for the 16 largest OECD countries counts a total of 96 equations, each containing a minimum (maximum) of 13 (31) parameters, of which 1 (3) for the lagged own variable, 5 (15) are for the lagged US series, 3 (9) for the lagged F and G series, and 4 for th”
• A Framework for Assessing Global Imbalances (2008, unknown): “Various authors, starting with Milesi-Ferretti and Razin (2000) and Freund (2005), have found that such adjustments have on average been accompanied by a slowdown in real GDP growth and currency depreciations in the defi cit countries.”