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Structural Change in Current Account and Real Exchange Rate Dynamics: Evidence from the G 7 Countries
Author(s) -
Shibamoto Masahiko,
Kitano Shigeto
Publication year - 2012
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12001
Subject(s) - economics , current account , depreciation (economics) , exchange rate , variable (mathematics) , structural break , shock (circulatory) , current (fluid) , econometrics , monetary economics , macroeconomics , dynamics (music) , microeconomics , physics , thermodynamics , medicine , profit (economics) , mathematical analysis , mathematics , capital formation , financial capital , acoustics
Previous studies decompose the current account and the real exchange rate into temporary and permanent shocks and argue that a temporary shock creates the combination of a current account surplus (deficit) and real exchange rate depreciation (appreciation). The present paper extends their framework by examining a possible structural break in current account and real exchange rate dynamics. Using G 7 country data for 1980–2007, we find structural changes in two‐variable dynamics for all G 7 countries during the 1990s. Temporary shocks have not been the main source of fluctuation in the current account since the 1990s. Our empirical results imply that the conventional mechanism has played a limited role in explaining the dynamics of the two variables.