What Drives the Current Account in Commodity Exporting Countries? The Cases of Chile and New Zealand

Abstract

This paper uses an open economy DSGE model with a commodity sector and nominal and real rigidities to ask what factors account for current account developments in two small commodity exporting countries. We estimate the model, using Bayesian techniques, on Chilean and on New Zealand data, and investigate the structural factors that explain the behaviour of the two countries' current accounts. We find that foreign financial conditions, investment-specific shocks, and foreign demand account for the bulk of the variation of the current accounts of the two countries. In the case of New Zealand fluctuations in commodity export prices have also been important. Monetary and fiscal policy shocks (deviations from policy rules) are estimated to have relatively small effects on the current account. We find interesting differences in Chilean and New Zealand responses to some shocks, despite similarities between the two economies and the common structural model employed.

DSGE Models and Central Banks

“…Edge et al (2008) have also built a more disaggregate DSGE model to improve the understanding of the historical evolution of natural rates of output and interest in the US. 10 At the Central Bank of Chile, the MAS model has been employed to quantify the contribution of different shocks to the business cycle, to compare the effects of transitory copper-price shocks under different fiscal rules or to analyse the factors accounting for current account developments (Medina and Soto 2007a;Medina and Soto 2007b;Medina et al 2008). The Sveriges Riksbank's RAMSES model has been applied to generate alternative scenarios to future alternative paths for wages, interest rates, external developments or for the analysis of monetary policy trade-offs arising under optimal monetary policy in an estimated DSGE model (Adolfson et al 2008a(Adolfson et al , 2007a(Adolfson et al , 2007b.…”

DSGE Models and Central Banks

“…Edge et al (2008) have also built a more disaggregate DSGE model to improve the understanding of the historical evolution of natural rates of output and interest in the US. 9 At the Central Bank of Chile, the MAS model has been employed to quantify the contribution of different shocks to the business cycle, to compare the effects of transitory copper-price shocks under different scal rules or to analyse the factors accounting for current account developments (Medina and Soto (2007a,b) and Medina et al (2008)). The Sveriges Riksbank's RAMSES model has been applied to generate alternative scenarios to future alternative paths for wages, interest rates or for different external economic developments (Adolfson et al (2007a,b)).…”

DSGE Models and Central Banks

“…Edge et al (2008) have also built a more disaggregate DSGE model to improve the understanding of the historical evolution of natural rates of output and interest in the US. 9 At the Central Bank of Chile, the MAS model has been employed to quantify the contribution of different shocks to the business cycle, to compare the effects of transitory copper-price shocks under different scal rules or to analyse the factors accounting for current account developments (Medina and Soto (2007a,b) and Medina et al (2008)). The Sveriges Riksbank's RAMSES model has been applied to generate alternative scenarios to future alternative paths for wages, interest rates or for different external economic developments (Adolfson et al (2007a,b)).…”