Structural Change in the External Balances Response to Macroeconomic Policies: Perspective from a Two-Sector New Open Economy Macroeconomic Model

• Published in: Review of international economics Vol. 21; no. 5; pp. 1021 - 1031
• Main Author: Yamamoto, Shugo
• Format: Journal Article
• Language: English
• Published: Oxford Blackwell Publishing Ltd 01.11.2013
• Subjects: Balance of trade; Economic policy; Economic theory; Elasticity of substitution; Empirical research; Impulse response functions; International trade; Japan; Macroeconomic policy; Macroeconomics; Open economies; Regression analysis; Structural change; Studies; Vector-autoregressive models; Japan
• ISSN: 0965-7576; 1467-9396
• DOI: 10.1111/roie.12087

The response of the Japanese trade balance against expansionary macroeconomic policy shocks changed from positive to negative in the 1990s. With consideration of intratemporal (between tradable and nontradable goods) and intertemporal elasticity of substitutions, we investigate this cause using two‐sector new open economy macroeconomics (NOEM). Empirical methods, considering structural change, were applied and show that before the break, intratemporal elasticity of substitution dominates, but subsequently the relation inverted and intertemporal elasticity became predominant and hence, the theoretical response of trade balance changed. Finally, we verify this theoretical implication empirically by impulse response analysis of structural vector auto regression.