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Sources of Fluctuations in the Real Exchange Rates and Trade Balances of the G-7: A Sign Restriction VAR Approach

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  • Hyeon-seung Huh
  • Won Soon Kwon

Abstract

This paper estimates structural vector autoregression models of output, the real exchange rate and trade balance for the group of seven leading advanced economies (G-7). Unlike previous studies, we do not impose long-run purchasing power parity as an identifying assumption; instead, the shocks underlying the model are structurally identified using a set of theory-consistent sign restrictions. Empirical results show that nominal shocks account for most of the long-run variability in trade balances across the G-7 countries. We are able to attribute this finding to long-run movements in the real exchange rate, as the real exchange rate is significantly affected by nominal shocks in the long run.

Suggested Citation

  • Hyeon-seung Huh & Won Soon Kwon, 2015. "Sources of Fluctuations in the Real Exchange Rates and Trade Balances of the G-7: A Sign Restriction VAR Approach," Review of International Economics, Wiley Blackwell, vol. 23(4), pages 715-737, September.
    • Handle: RePEc:bla:reviec:v:23:y:2015:i:4:p:715-737
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    3. Chen, Chuanglian & Yao, Shujie & Ou, Jinghua, 2017. "Exchange rate dynamics in a Taylor rule framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 158-173.

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