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Exchange rate regimes and current account persistence

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  • Fu‐Min Tseng
  • Jyh‐Lin Wu

Abstract

We empirically examine Friedman's hypothesis that floating exchange rates facilitate current account adjustments. The main innovation in the empirical analysis is to control for the sample selection bias. We provide robust evidence that current account persistence decreases with the flexibility of nominal exchange rate regimes and is significantly higher under hard pegs than under floating for industrial countries. The economic driving force of this finding is that the channel of the exchange rate adjustment mechanism dominates in affecting the real exchange rate persistence relative to its shock channel.

Suggested Citation

  • Fu‐Min Tseng & Jyh‐Lin Wu, 2023. "Exchange rate regimes and current account persistence," The World Economy, Wiley Blackwell, vol. 46(5), pages 1423-1443, May.
    • Handle: RePEc:bla:worlde:v:46:y:2023:i:5:p:1423-1443
    DOI: 10.1111/twec.13325
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    References listed on IDEAS

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