Sources of time-varying trade balance and real exchange rate dynamics in East Asia

Sohrab Rafiq

Journal of the Japanese and International Economies, 2013, vol. 29, issue C, 117-141

Abstract: A sticky-price model with minimal assumptions for identification is used to motivate a time-varying model that allows for state dependent innovations to explore the trade balance dynamics of a group of East Asian economies. This paper shows that the correlation between the trade balance and the real exchange has historically been highly conditional on the type of macroeconomic shock. Permanent (transitory) shocks have historically produced a positive (negative) correlation between the trade balance and real exchange rate over the last 20years. Second, since the Asian financial crisis the real exchange rate dynamics of the East Asian countries have been dominated by persistent component(s), while the dynamics of the trade balance have been more influenced by transitory factors.

Keywords: Exchange rate; Trade balance; Time-variation; Correlation; Asia (search for similar items in EconPapers)
JEL-codes: C5 F14 F32 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:29:y:2013:i:c:p:117-141

DOI: 10.1016/j.jjie.2013.06.001

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