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The canonical predictions of intertemporal open-economy macro models are tested by a structural VAR analysis of Group of Seven countries. The analysis is distinguished from the previous literature in that it adopts minimal assumptions for identification. Consistent with a large set of theoretical models, permanent shocks have large long-term effects on the real exchange rate but relatively small effects on the current account; temporary shocks have large effects on the current account and exchange rate in the short run, but not on either variable in the long run. The signs of some impulse responses point toward models that differentiate tradables and nontradables.
We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.
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.
We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to understand the role of the real exchange rate for current account fluctuations.
This book looks at the PPP persistence puzzle, and econometric aspects of exchange rate dynamics and their implications. It also explores the importance of exchange rate dynamics in the pass-through effects (PTE) and the econometric aspects of the exchange rates dynamics linked to structural shocks on different economies.
Structural change, economic growth and adequate exchange rate adjustment are key challenges in the context of EU eastern enlargement as are consistent macroeconomic policies. The authors focus on sectoral adjustment across industries in catching-up countries and explain changes in the composition of output – this includes new aspects of the Chenery model. They describe and analyze the spatial pattern of specialization and adjustment in many countries. Theoretical and empirical analysis of foreign direct investment, innovation and structural change shed new light on economic dynamics in Old Europe and New Europe. As regards exchange rate dynamics both traditional aspects (such as the Balassa-Samuelson effect) and new approaches to understanding exchange rate developments are presented. Links between exchange rate changes and innovation are particularly emphasized.
We survey the literature on the two main views of exchange rate determination that have evolved since the early 1970s: the monetary approach to the exchange rate (in flex-price, sticky-price and real interest differential formulations) and the portfolio balance approach. We then go on to discuss the extant empirical evidence on these models and conclude by discussing how the future research strategy in the area of exchange rate determination is likely to develop. We also discuss the literature on foreign exchange market efficiency, on exchange rates and ‘news’ and on international parity conditions.
This volume grew out of a National Bureau of Economic Research conference on exchange rates held in Bellagio, Italy, in 1982. In it, the world's most respected international monetary economists discuss three significant new views on the economics of exchange rates - Rudiger Dornbusch's overshooting model, Jacob Frenkel's and Michael Mussa's asset market variants, and Pentti Kouri's current account/portfolio approach. Their papers test these views with evidence from empirical studies and analyze a number of exchange rate policies in use today, including those of the European Monetary System.