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East Asian Economic Review Vol. 12, No. 2, 2008. pp. 3-32.

DOI https://dx.doi.org/10.11644/KIEP.JEAI.2008.12.2.187

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Relative Price Levels and Current Accounts: An Exploration

Author

Joshua Aizenman

UCSC and the NBER

jaizen@ucsc.edu
Creative Commons Attribution License

EAER is an open access journal distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license.

Abstract

This paper studies the links between current accounts and relative price levels, finding that current account changes are associated with sizable future relative price levels effects. This is done in panel regressions of the Penn effect, adding a lagged current account/GDP and other explanatory variables. Higher GDP/ capita and a greater export share of manufacturing tend to mitigate the real exchange rate impact of lagged current accounts. Active management of current accounts may provide a powerful adjustment channel, mitigating the real exchange rate effects of volatile terms of trade, and may explain the growing proliferation of Sovereign Wealth Funds.

JEL classification: F15, F21, F32

Keywords

Current account, Relative Price Levels, Real Exchange Rate, Sovereign Wealth Funds

Language

English

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