Current Account Dynamics: On Income and Trade Balance

Author Name YOSHIDA Yushi (Shiga University) / Weiyang ZHAI (Shiga University / Research Assistant, RIETI)
Creation Date/NO. September 2021 21-E-077
Research Project Exchange Rates and International Currency
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We investigate the dynamics of Japan's income and trade balance between 1996:Q1 and 2019:Q4 via a structural VAR model. The two most important constituents of the current account (trade balance and income balance) and seven other macroeconomic variables are entered in our VAR model. We implement a shadow rate for the measure of monetary policy under the unconventional monetary policy regime, including a zero lower bound interest rate. By using a standard SVAR model from the literature, we find that world shocks dominate and rule the dynamics of Japan's current account. Through additional short-run zero restrictions, we also find that exogenous exchange rate shocks affect the current account.