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Exchange Rate Flexibility and Current Account Adjustment¡ªA Threshold VAR Analysis

Author

Listed:
  • Yu You

    (International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China)

  • Yoonbai Kim

    (Department of Economics, University of Kentucky, Lexington, KY 40506-0034, USA)

  • Zongye Huang

    (International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China)

Abstract

Global imbalances (current account imbalances) have become an important issue for economists and policy makers. Greater exchange rate flexibility is often suggested as a means to achieve faster and more efficient adjustment in the current account. However, previous empirical studies show little support for this hypothesis. This paper revisits this issue with a large panel dataset and a threshold VAR model and finds that (1) some existing popular exchange rate classifications may not capture actual exchange rate variability as well as expected; (2) Once exchange rate variability is correctly identified, the speed of mean reversion in the current account balance is indeed higher in a regime with greater exchange rate variability.

Suggested Citation

  • Yu You & Yoonbai Kim & Zongye Huang, 2016. "Exchange Rate Flexibility and Current Account Adjustment¡ªA Threshold VAR Analysis," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 11(4), pages 635-667, December.
    • Handle: RePEc:fec:journl:v:11:y:2016:i:4:p:635-667
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-005-016-0032-3
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    More about this item

    Keywords

    global imbalances; current account; exchange rate regimes; threshold VAR;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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