Asset Prices and Current Account Fluctuations in G-7 Economies

Abstract

4Non-technical summary 5

A Forensic Analysis of Global Imbalances

“…Here we consider the possibility that rising house prices may have created a wealth effect and consequently contributed to increasing domestic absorption particularly in this period. Previous researchers have focussed on the effect of the housing markets on current account balances (see Aizenman and Jinjarak, 2009;Fratzscher and Straub, 2009); their results highlight the extent to which asset market booms attract capital inflows, thus worsening current account balances; our estimates can be thought of as extensions of that work. Figure 4 shows scatter plots of the prediction errors.…”

“…Blanchard and Giavazzi (2002) and Abiad et al (2007) find evidence for financial integration leading to current account deterioration in the experience of the European integration. Although we are not aware of any other publications that empirically examine the effect of leveraging on current account balances, Jinjarak (2009) andStraub (2009) show that asset market booms can worsen current account balances. Although some portion of current account imbalances are left as country-specific factors, this finding is also shared by other papers, such as Gruber and Kamin (2007).…”

“…12 Although this is a limitation, estimating the relationship with only this limited data set may still shed light on the link between the asset market behaviour and current account balances (like Aizenman and Jinjarak, 2009;Fratzscher and Straub, 2009), given that the housing boom prior to the global financial crisis concentrated on advanced economies. Regressions in which we include HH-Leverage 1 and HH-Leverage 2 use data for 1996 on, for instance, the last three five-year panels, 1996-2000, 2001-5, and 2006-8. Regressions with G-Leverage start with 1971, although the sample is limited in earlier years.…”

Exploring the International Transmission of U.S. Stock Price Movements

“…For example, Beaudry and Portier (2006) argue that shocks to stock prices reflect changes in agents' expectations about future total factor productivity which is in turn an important driver of U.S. business cycles. Fratzscher et al (2007) point to stock market wealth as an explanation for U.S. external imbalances, while in an extension to the G-7 countries, Fratzscher and Straub (2009) find that shocks to stock returns have sizeable effects on external accounts. Furthermore, Assenmacher-Wesche and Gerlach (2008) study the relationship between stock prices, real activity and prices in industrialized countries and find a significant transmission of stock price shocks.…”

“…One camp uses sign restrictions on impulse responses and treats shocks to stock prices as demand side business cycle shocks, assuming that stock prices impact on real actvity and prices (see, e.g., Fratzscher et al, 2007;Fratzscher and Straub, 2009). Another camp imposes zero restrictions on impulse matrices and rules out a contemporaneous effect of stock prices on real actvity, prices and interest rates (see, e.g., Assenmacher-Wesche and Gerlach, 2008).…”