Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173459
Authors: 
Hjortsoe, Ida
Weale, Martin
Wieladek, Tomasz
Year of Publication: 
2016
Series/Report no.: 
External MPC Unit Discussion Paper 45
Abstract: 
Does the current account improve or deteriorate following a monetary policy expansion? We examine this issue theoretically and empirically. We show that a standard open economy DSGE model predicts that the current account response to a monetary policy shock depends on the degree of economic regulation in different markets. In particular, financial (product market) liberalisation makes it more likely that the current account deteriorates (improves) following a monetary expansion. We test these theoretical predictions with a varying coefficient Bayesian panel VAR model, where the coefficients are allowed to vary as a function of the degree of financial, product and labour market regulation on data from 1976 Q1-2006 Q4 for 19 OECD countries. Our empirical results support the theory. We therefore conclude that following a monetary policy expansion, the current account is more likely to go into deficit (surplus) in countries with more liberalised financial (product) markets.
Subjects: 
Balance of payments
current account
Bayesian panel VAR
economic liberalisation
monetary policy
JEL: 
F32
E52
C11
C23
Document Type: 
Working Paper

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