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

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Abstract:

This article explores the relation between stock prices and the current account for 17 Organization for Economic Co-operation and Development (OECD) countries in 1980–2007. A panel Vector Autoregressive (VAR) model is used 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 2 years. Hence a channel – in addition to the traditional exchange rate channel – is found through which external balance for an OECD country with a current account imbalance can be restored.

Keywords: C33; E44; F32; OECD countries; current account fluctuations; panel VAR; stock prices

Document Type: Research Article

DOI: https://doi.org/10.1080/00036846.2012.659349

Affiliations: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich e.V., Poschingerstr. 581679 Munich, Germany

Publication date: 2013-06-01

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