Dominant Drivers of Current Account Dynamics

IMF Working Papers, April 26, 2024

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We estimate shocks that explain most of the variation in the current account at business cycle frequencies and over the long run.
Using a standard open-economy macro model, we explore which macroeconomic shocks are behind the empirical dominant drivers of the current account at business-cycle frequency.
Shocks to the relative demand between home and foreign goods are found to play a pivotal role in current account dynamics.
Rather than financial shocks or aggregate shocks to supply or demand, relative-demand shocks primarily drive current account movements at business-cycle frequency.

Empirical estimation of shocks that account for the bulk of current account variation at business-cycle frequencies and over the long run.
Structural exploration using a standard open-economy macro model to map empirical dominant drivers to macroeconomic shock types.
Focused comparison across financial shocks, aggregate supply shocks, aggregate demand shocks, and relative-demand shocks.

Subject: Balance of payments, Business cycles, Current account, Current account balance, Economic growth, Exchange rates, Foreign exchange, Nominal effective exchange rate
Keywords: Business cycles, business-cycle frequency, CA shock, Current Account, Current account balance, current account dynamics, Exchange Rates, Global, IMF working paper 24/92, impulse response, Nominal effective exchange rate, Open- Economy Model, Relative Demand

Analytical focus on relative-demand shocks is critical for understanding current account dynamics at business-cycle frequencies.
Policy analysis and forecasting should incorporate measures of relative demand between domestic and foreign goods, alongside traditional financial and aggregate shock assessments.

IMF Working Papers — Dominant Drivers of Current Account Dynamics (Lukas Boer; Jaewoo Lee), April 26, 2024.