The growth of Asian FX markets

April 2008

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 .nd that foreign .nancial conditions, investment-speci.c 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 .uctuations in commodity export prices have also been important. Monetary and .scal policy shocks (deviations from policy rules) are estimated to have relatively small e¤ects on the current account. We .nd interesting di¤erences in Chilean and New Zealand responses to some shocks, despite similarities between the two economies and the common structural model employed.