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Persistence of Current-account Disequilibria and Real Exchange-rate Misalignments

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  • Blaise Gnimassoun
  • Valérie Mignon

Abstract

This paper aims at studying whether the persistence of the gap between the observed current-account position and its equilibrium value nonlinearly depends on real exchange-rate misalignments. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we find evidence for this hypothesis, showing that persistence of current-account imbalances strongly depends on the deviation of the real exchange rate from its long-term equilibrium. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non-eurozone members.

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  • Blaise Gnimassoun & Valérie Mignon, 2015. "Persistence of Current-account Disequilibria and Real Exchange-rate Misalignments," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 137-159, February.
  • Handle: RePEc:bla:reviec:v:23:y:2015:i:1:p:137-159
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