Exchange Rate Fluctuations and the Balance of Payments: Channels of Interaction in Developing and Developed Countries
AbstractAgents engage in a process of forecasting the exchange rate based on observations of macroeconomic fundamentals. Deviations in the realized exchange rate from agents’ forecasts determine fluctuations in components of the current and financial accounts of the balance of payments in a sample of developing and industrial countries. Absent measures to stimulate export growth in developing countries and given their high dependency on imports, the current account balance deteriorates with respect to currency depreciation. Across industrial countries, the reduction in the value of exports with respect to currency depreciation correlates with a reduction in the value of imports. The combined effect cancel out on the trade and current account balances in industrial countries. Similarly, currency appreciation increases the nominal value of exports and imports without a significant effect on the current account balance in industrial countries. The combined evidence highlights the benefits of a flexible exchange rate system, prevailing in many industrial countries, to ensure that a depreciating rate curbs import growth and increases financial flows. In contrast, currency appreciation increases imports and deteriorates the current account balance across developing countries. Moreover, the evidence indicates the adverse effect of an overvalued exchange rate and the expected deterioration in the balance of payments should developing countries be forced to abandon a peg abruptly.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.
Volume (Year): 24 (2009)
Issue (Month): ()
exchange rate; anticipated vs. unanticipated fluctuations; external exposure; economic activity; supply vs. demand channels;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jong-Eun Lee).
If references are entirely missing, you can add them using this form.