Monetary policy and the current account: Theory and evidence

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: External MPC Unit Discussion Paper ; No. 45

Classification and Topics

• Classification: Wirtschaft ; Current Account Adjustment; Short-term Capital Movements ; Monetary Policy ; Bayesian Analysis: General ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
• Subject: Balance of payments ; current account ; Bayesian panel VAR ; economic liberalisation ; monetary policy ; Geldpolitik ; Schock ; Außenwirtschaftliches Gleichgewicht ; DSGE-Modell ; Finanzmarktregulierung ; Theorie ; Wirkungsanalyse ; Schätzung ; OECD-Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hjortsoe, Ida ; Weale, Martin ; Wieladek, Tomasz
• Event: Veröffentlichung
• (who): Bank of England, External Monetary Policy Committee Unit
• (where): London
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/173459
• Last update: 10.03.2025, 11:43 AM CET