Dominant Drivers of Current Account Dynamics

Lucas Boer, Jaewoo Lee, Mingzuo Sun   Published : January 2026   JEL Code: C32, E32, F31, F32   URL to this Article: https://doi.org/10.1016/j.jinteco.2025.104199

Abstract

What are the key drivers of current account dynamics? We estimate shocks that explain most of the variation in the current account for the US and other G7 economies. Discovering that the dominant shocks contradict the expenditure switching effect at business cycle frequency, we then explore which macroeconomic shocks are behind these empirical dominant drivers of the current account. Rather than traditional aggregate shocks to supply and demand or recently emphasized financial shocks, shocks to the relative demand between home and foreign goods are found to play a pivotal role in current account dynamics.

Keywords

Current account; Exchange rates; Relative demand; Open-economy model