Walter Enders and Kaouthar Souki
Abstract
A common assumption in the open-economy macroeconomics literature is that global shocks have little influence on current account balances, relative output levels, and real exchange rates. The aim of the paper is to develop an identification scheme that allows for the possibility that global shocks can affect all countries asymmetrically. Toward this end, we use a four-variable structural vector autoregression (VAR) of the Sims-Bernanke type that allows us to obtain a global shock and three country-specific shocks. We find that global shocks explain almost all of the movements in the German/US real exchange rate and sizable portions of the movements in the other real rates. Moreover, global shocks are important in explaining the changes in the bilateral current accounts between the three countries considered. Our decomposition also allows us to measure the extent to which third-country effects are important in explaining bilateral real exchange rates and relative output levels.