To identify nominal shocks in structural VAR models of open economies, it is common practice to use purchasing power parity as a long-run identifying restriction so that there are no long-run effects of nominal shocks on real exchange rates. However, in some recent open economy intertemporal models with sticky prices, nominal shocks can have long-run effects on both real exchange rates and trade balances. In this paper, structural VAR models for the G-7 are identified in such a way that nominal shocks, at least potentially, can have long-run effects on a country's real exchange rate. For the G-7, nominal shocks are found to have a significant long-run effect on each country's trade balance over the post-Bretton Woods period. We do not have to appeal to hysteresis effects to explain this finding for trade balances, since nominal shocks are found to have a significant long-run effect on each country's real exchange rate.
Bibliographical noteFunding Information:
We would like to thank two anonymous referees for their comments and for helping to improve the exposition of the paper. We also thank participants at the 2001 Australasian meetings of the Econometric Society, Auckland, New Zealand, for helpful comments. This research was supported by Hallym Academy of Sciences at Hallym University. The usual disclaimer applies.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics