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Asset prices, exchange rates and the current account

Author

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  • Fratzscher, Marcel
  • Juvenal, Luciana
  • Sarno, Lucio
Abstract
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 32% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been much less relevant, explaining less than 7% and exerting a more temporary effect on the US trade balance. Our findings suggest that sizeable exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a more potent source of adjustment. JEL Classification: F32, F40, C30

Suggested Citation

  • Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2007. "Asset prices, exchange rates and the current account," Working Paper Series 790, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007790
    Note: 335955
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    More about this item

    Keywords

    Bayesian VAR; current account; exchange rates; global imbalances; sign restrictions.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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