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Asset Prices, News Shocks, and the Trade Balance
Author(s) -
FRATZSCHER MARCEL,
STRAUB ROLAND
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12050
Subject(s) - economics , balance of trade , monetary economics , equity (law) , shock (circulatory) , balance sheet , general equilibrium theory , exchange rate , current account , bayesian vector autoregression , asset (computer security) , terms of trade , financial market , productivity , balance (ability) , dynamic stochastic general equilibrium , international economics , macroeconomics , bayesian probability , monetary policy , finance , medicine , computer security , artificial intelligence , political science , law , computer science , physical medicine and rehabilitation
We analyze the relationship between asset prices and the trade balance estimating a Bayesian VAR for a broad set of 38 industrialized and emerging market countries. To derive model‐based identifying restrictions, we model asset price shocks as news shocks about future productivity in a two‐country dynamic stochastic general equilibrium model. Such shocks are found to exert sizable effects on the trade balance. Moreover, the effects are highly heterogeneous across countries. For instance, following a news shock that implies on impact a 10% increase in domestic equity prices relative to the rest of the world, the U.S. trade balance will worsen by up to 1.0 percentage points, but much less so for most other economies. We find that this heterogeneity appears to be linked to the financial market depth and equity home bias of countries. Moreover, the channels via wealth effects and via the real exchange rate are important for understanding the heterogeneity in the transmission.