The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies
NBER Working Paper No. 6495
A sticky-price model is used to motivate a structural VAR analysis of the current account and the real exchange rate for seven major industrialized countries (the US, Canada, the UK, Japan, Germany, France and Italy). The analysis is distinguished from previous work in that it adopts minimal assumptions for identification. The empirical results are consistent with the theoretical model, as well as the sticky price intertemporal model of Obstfeld and Rogoff (1995). Permanent shocks to productivity have large long term effects on the real exchange rate, but relatively small effects on the current account; money shocks have large effects on the current account and exchange rate in the short run, but not on either variable in the long run.
Published: Lee, Jaewoo and Menzie D. Chinn. "Current Account And Real Exchange Rate Dynamics In The G7 Countries," Journal of International Money and Finance, 2006, v25(2,Mar), 257-274.