Sources of Fluctuations in the Real Exchange Rates and Trade Balances of the G-7: A Sign Restriction VAR Approach

Hyeon Seung Huh, Won Soon Kwon

Research output: Contribution to journalArticle

2 Citations (Scopus)


This paper estimates structural vector autoregression models of output, the real exchange rate and trade balance for the group of seven leading advanced economies (G-7). Unlike previous studies, we do not impose long-run purchasing power parity as an identifying assumption; instead, the shocks underlying the model are structurally identified using a set of theory-consistent sign restrictions. Empirical results show that nominal shocks account for most of the long-run variability in trade balances across the G-7 countries. We are able to attribute this finding to long-run movements in the real exchange rate, as the real exchange rate is significantly affected by nominal shocks in the long run.

Original languageEnglish
Pages (from-to)715-737
Number of pages23
JournalReview of International Economics
Issue number4
Publication statusPublished - 2015 Jan 1


All Science Journal Classification (ASJC) codes

  • Geography, Planning and Development
  • Development

Cite this