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Do common currencies facilitate the net flow of capital among countries?

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  • Slavov, Slavi T.

Abstract

Earlier studies have hypothesized that membership in a common currency arrangement (either a currency union or a currency board) is associated with larger current account imbalances (either deficits or surpluses) for participating countries. This paper examines a panel of 128 countries over the period 1976-2005, and finds that the current account balances of common currency participants are more highly correlated with fundamental factors (such as net foreign assets, incomes, growth rates, fiscal policy, demographics, resource endowments) than the current accounts of non-participants. Furthermore, this greater sensitivity to fundamentals leads to larger current account imbalances. Participation in a common currency is typically associated with a 1.6 percent increase in a country's current account imbalance. Larger current account imbalances under common currency arrangements could be a sign of increased financial integration. Alternatively, they could reflect the difficulties of current account adjustment under fixed exchange rates.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 20 (2009)
Issue (Month): 2 (August)
Pages: 124-144

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Handle: RePEc:eee:ecofin:v:20:y:2009:i:2:p:124-144

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Web page: http://www.elsevier.com/locate/inca/620163

Related research

Keywords: Monetary unions Currency boards Current account dynamics;

References

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Cited by:
  1. Schmitz, Birgit & von Hagen, Jürgen, 2011. "Current account imbalances and financial integration in the euro area," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1676-1695.
  2. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.

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