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Currency Appreciation and Current Account Adjustment

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  • Michael B. Devereux

    (University of British Columbia)

  • Hans Genberg

    (Hong Kong Monetary Authority, Hong Kong Institute for Monetary Research)

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

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 172006.

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Length: 21 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:hkm:wpaper:172006

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Keywords: Current Account; Currency Appreciation;

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References

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  1. Maurice Obstfeld & Kenneth Rogoff, 2004. "The Unsustainable US Current Account Position Revisited," NBER Working Papers 10869, National Bureau of Economic Research, Inc.
  2. 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.
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  4. Michele Cavallo & Cedric Tille, 2006. "Could capital gains smooth a current account rebalancing?," 2006 Meeting Papers 252, Society for Economic Dynamics.
  5. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc.
  6. 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.
  7. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York.
  8. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International Financial Adjustment," International Finance 0505004, EconWPA.
  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. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
  11. Linda Goldberg & Cedric Tille, 2006. "The internationalization of the dollar and trade balance adjustment," Staff Reports 255, Federal Reserve Bank of New York.
  12. 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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Cited by:
  1. 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.
  2. 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.
  3. Marcus Kappler & Helmut Reisen & Moritz Schularick & Edouard Turkisch, 2011. "The Macroeconomic Effects of Large Exchange Rate Appreciations," OECD Development Centre Working Papers 296, OECD Publishing.
  4. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, Xing Wang, 2012. "Are Chinese Trade Flows Different?," BOFIT Discussion Papers 14/2012, Bank of Finland, Institute for Economies in Transition.
  5. An, Lian, 2006. "Exchange Rate Pass-Through:Evidence Based on Vector Autoregression with Sign Restrictions," MPRA Paper 527, University Library of Munich, Germany.
  6. 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.
  7. 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.
  8. Marvin Goodfriend, 2007. "Monetary Policy in East Asia: Common Concerns," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 207-232, December.
  9. Leon, Jorge, 2010. "International Portfolios and the U.S. Current Account," MPRA Paper 45281, University Library of Munich, Germany.
  10. 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.
  11. Straub, Roland & Thimann, Christian, 2009. "The external and domestic side of macroeconomic adjustment in China," Working Paper Series 1040, European Central Bank.
  12. 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.
  13. 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.
  14. 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.

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