The Current Account, Supply Shocks, and Accomodative Fiscal Policy: Interpretations of Swedish Post-War Data

Englund, PeterStockholms universitet,Institutet för internationell ekonomi (author)

The Current Account, Supply Shocks, and Accomodative Fiscal Policy : Interpretations of Swedish Post-War Data

Seminar Paper / Institute for International Economic Studies, Stockholm University,0347-8769 ;399

The aim of the paper is to asses empirically the importance of different types of shocks in explaining the Swedish current account. We do this by first estimating an unrestricted vector autoregression system in these four variables: the real wage, the terms of trade, governmnet consumption, and the current accout. We then perform innovation accouting and impulse response studies based on a particular structural model that allows identification of the parameters of the contemporaneous relations between the variables. The model allows for labour-union determined wages, and government consumption is taken to be accomodative in response to private sector labour demand. A principal finding is that the forecast error variance in the current account is to a very limited extent (less than 20 per cent over a couple of years) explained by innovations to the wage, terms-of-trade, or government-consumption equations. This is in contrast with the "conventional wisdom" and also with the results for some of the other variables. For example, innovations in the wage equation explain less than half of the variance of the wage.

Vredin, AndersStockholm School of Economics (author)
Stockholms universitetInstitutet för internationell ekonomi (creator_code:org_t)

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