Cross-country evidence on the relation between stock prices and the current account

Berg, Tim Oliver (2010): Cross-country evidence on the relation between stock prices and the current account.

Abstract

This paper explores the relation between stock prices and the current account for 17 OECD countries in 1980-2007. I use a panel vector autoregression (VAR) to compare the effects of stock price shocks to those originating from monetary policy and exchange rates. While monetary policy shocks have little effects, shocks to stock prices and exchange rates have sizeable effects. A 10% contraction in stock prices improves the current account by 0.3% after two years. Hence I find a channel, in addition to the traditional exchange rate channel, through which external balance for an OECD country with a current account imbalance can be restored.

• Item Type: MPRA Paper
• Language: English
• Keywords: current account fluctuations, stock prices, panel VAR
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models

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