Abstract
This article investigates empirically whether shocks to asset prices transmit into the trade balance through consumption and investment for a group of five of the world’s most industrialized countries. We refer to this transmission channel as the international wealth channel and estimate a GVAR model including 29 countries with quarterly data over the period 1981Q1–2006Q4. Generalized impulse response functions show that after a negative stock price shock US and UK consumption decreases, followed by an improving trade balance. This pattern is also visible for France, but not for Germany and Japan. Stock price decreases are only associated with decreasing investment and an improving trade balance in the UK. For housing, we do find that a negative shock to UK housing prices decreases domestic investment and improves the trade balance. However, this pattern is not visible in the other countries. Finally, a domestic negative real exchange rate shock only has a significantly positive impact on the US trade balance.
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Acknowledgments
The authors thank seminar participants at Trinity College Dublin, STATEC Luxembourg, DIW Macroeconometric Workshop Berlin, EEFS Conference Warsaw, INFINITI Conference Dublin, and NAKE Research Day Utrecht for useful comments. They also thank Michel Beine, Bertrand Candelon, Clemens Kool, Ayhan Kose, Joan Muysken, Jean-Pierre Urbain, and two anonymous referees for constructive comments and discussions. The second author gratefully acknowledges support by the Fonds National de Recherche Luxembourg under grant FNR/VIVRE/06/30/10. Views expressed in this article do not necessarily coincide with those of De Nederlandsche Bank. All errors are our own.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Holinski, N., Vermeulen, R. The international wealth channel: a global error-correcting analysis. Empir Econ 43, 985–1010 (2012). https://doi.org/10.1007/s00181-011-0514-8
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DOI: https://doi.org/10.1007/s00181-011-0514-8