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Currency appreciation and current account adjustment

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  • Devereux, Michael B.
  • Genberg, Hans

Abstract

A central aspect of the recent debate on global imbalances and the US current account deficit is the role of the exchange rate peg being followed by China and other Asian economies. While one view has stressed the need for Asian currency appreciation, another focuses on the importance of fiscal adjustment and more generally adjustment in relative savings rates in the US and Asian economies. This paper develops a simple two-region open economy macroeconomic model to analyze the alternative impacts of currency appreciation and fiscal adjustment on the current account. We stress a number of structural features of emerging Asian economies that may make currency appreciation an ineffective means of current account adjustment relative to fiscal policy changes. In addition, we note that there may be a welfare conflict between regions on the best way to achieve adjustment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 26 (2007)
Issue (Month): 4 (June)
Pages: 570-586

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Handle: RePEc:eee:jimfin:v:26:y:2007:i:4:p:570-586

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Web page: http://www.elsevier.com/locate/inca/30443

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References

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  1. Linda Goldberg & Cedric Tille, 2006. "The internationalization of the dollar and trade balance adjustment," Staff Reports 255, Federal Reserve Bank of New York.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  3. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2009. "The valuation channel of external adjustment," Working Papers 09-18, Federal Reserve Bank of Boston.
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  5. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  6. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
  7. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
  8. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376 National Bureau of Economic Research, Inc.
  9. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Jan).
  10. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  11. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
  12. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  13. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II," IMF Working Papers 06/69, International Monetary Fund.
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Citations

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Cited by:
  1. Mohamed Arouri & Arif Billah Dar & Niyati Bhanja & Aviral Kumar Tiwari & FrédéricTeulon, 2014. "Interlinkage between Real Exchange rate and Current Account Behaviors: Evidence from India," Working Papers 2014-088, Department of Research, Ipag Business School.
  2. Yin-Wong Cheung & Menzie D. Chinn & XingWang Qian, 2012. "Are Chinese Trade Flows Different?," NBER Working Papers 17875, National Bureau of Economic Research, Inc.
  3. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," ZEW Discussion Papers 11-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Marvin Goodfriend, 2007. "Monetary Policy in East Asia: Common Concerns," IMES Discussion Paper Series 07-E-18, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Charles Engel, 2010. "Exchange rate policies," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 229-250 Bank for International Settlements.
  6. Lian An & Jian Wang, 2011. "Exchange rate pass-through: evidence based on vector autoregression with sign restrictions," Globalization and Monetary Policy Institute Working Paper 70, Federal Reserve Bank of Dallas.
  7. Straub, Roland & Thimann, Christian, 2010. "The external and domestic side of macroeconomic adjustment in China," Journal of Asian Economics, Elsevier, vol. 21(5), pages 425-444, October.
  8. Bagnai, Alberto, 2009. "The role of China in global external imbalances: Some further evidence," China Economic Review, Elsevier, vol. 20(3), pages 508-526, September.
  9. Chen Kuo, 2013. "Is the liberalization policy effective on improving bivariate cointegration of current accounts, foreign exchange, stock prices? Further evidence from Asian markets," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(4), pages 1923-1941, June.
  10. Leon, Jorge, 2010. "International Portfolios and the U.S. Current Account," MPRA Paper 45281, University Library of Munich, Germany.
  11. Luigi Bonatti & Andrea Fracasso, 2009. "The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting," Department of Economics Working Papers 0905, Department of Economics, University of Trento, Italia.
  12. Sabine Herrmann, 2009. "Do We Really Know That Flexible Exchange Rates Facilitate Current Account Adjustment? Some New Empirical Evidence for CEE Countries," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 55(4), pages 295-312.
  13. Zhiwei Zhang & Wenlang Zhang & Gaofeng Han, 2009. "How Does the US Credit Crisis Affect the Asia-Pacific Economies? --- Analysis based on a General Equilibrium Model," Working Papers 0912, Hong Kong Monetary Authority.
  14. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2010. "Measuring Renminbi Misalignment: Where Do We Stand?," Working Papers 242010, Hong Kong Institute for Monetary Research.

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