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A Faith-Based Initiative Meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?

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Author Info

  • Menzie D. Chinn

    (University of Wisconsin, and NBER)

  • Shang-Jin Wei

    (Columbia University and NBER)

Abstract

It is often asserted that a flexible exchange rate regime would facilitate current account adjustment. Using data on over 170 countries over the 1971–2005 period, we examine this assertion systematically. We find no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development and trade and capital account openness. This finding presents a challenge to the Friedman (1953) hypothesis and a popular policy recommendation by international financial institutions. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 95 (2013)
Issue (Month): 1 (March)
Pages: 168-184

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Handle: RePEc:tpr:restat:v:95:y:2013:i:1:p:168-184

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Web page: http://mitpress.mit.edu/journals/

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Related research

Keywords: floating exchange rate; fixed exchange rate; current account imbalances; real exchange rates;

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Cited by:
  1. Lubos Komarek & Michal Skorepa, 2013. "Sources of Asymmetric Shocks: The Exchange Rate or Other Culprits?," Working Papers, Czech National Bank, Research Department 2013/12, Czech National Bank, Research Department.
  2. Berger, Helge & Nitsch, Volker, 2014. "Wearing corset, losing shape: The euro's effect on trade imbalances," Journal of Policy Modeling, Elsevier, Elsevier, vol. 36(1), pages 136-155.
  3. Gnimassoun, Blaise & Coulibaly, Issiaka, 2014. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Economic Modelling, Elsevier, Elsevier, vol. 40(C), pages 208-226.
  4. Nitsch, Volker & Berger, Helge, 2013. "On the Persistence of Trade Imbalances: Evidence from Europe," Darmstadt Discussion Papers in Economics, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) 61306, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  5. Allegret, Jean-Pierre & Sallenave, Audrey, 2014. "The impact of real exchange rates adjustments on global imbalances: A multilateral approach," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 149-163.
  6. Blaise Gnimassoun, 2014. "The importance of the exchange rate regime in limiting current account imbalances in sub-Saharan African countries," EconomiX Working Papers, University of Paris West - Nanterre la Défense, EconomiX 2014-22, University of Paris West - Nanterre la Défense, EconomiX.
  7. Atish R. Ghosh & Jonathan David Ostry & Mahvash Saeed Qureshi, 2014. "Exchange Rate Management and Crisis Susceptibility: A Reassessment," IMF Working Papers, International Monetary Fund 14/11, International Monetary Fund.
  8. Gazi M. Hassan & Mark J. Holmes, 2014. "Do Remittances Facilitate a Sustainable Current Account?," Working Papers in Economics, University of Waikato, Department of Economics 14/07, University of Waikato, Department of Economics.

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