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Current-Account Imbalances, Real Exchange-Rate Misalignments, and Output Gaps

Author

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  • Camba-Crespo Alfonso

    (International Doctorate School, UNED, Madrid 28040, Spain)

  • García-Solanes José

    (Department of Economic Analysis, Murcia University, Spain)

  • Torrejón-Flores Fernando

    (Department of Applied Economics, Murcia University, Spain)

Abstract

This study analyzes the relationships between domestic and foreign output gaps, current-account imbalances, and real effective exchange-rate (REER) misalignments. We first set up a theoretical framework based on the elasticities and absorption approaches of the balance of payments to derive and clarify these relationships. Next, we perform panel VAR estimates in a sample of 18 advanced economies between 1986 and 2017. We find an inverse relationship between domestic output gaps and current accounts with reciprocal influences between the two variables. Moreover, we observe that increases in current accounts generally boost both temporary and structural growth. Additionally, our results indicate that REER misalignment shocks cause reactions of the opposite sign on the current account and on cyclical economic growth. We also find evidence of higher growth resulting in a real exchange-rate appreciation, which supports the Balassa–Samuelson hypothesis.

Suggested Citation

  • Camba-Crespo Alfonso & García-Solanes José & Torrejón-Flores Fernando, 2022. "Current-Account Imbalances, Real Exchange-Rate Misalignments, and Output Gaps," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 16(1), pages 57-72, January.
    • Handle: RePEc:bpj:econoa:v:16:y:2022:i:1:p:57-72:n:2
    DOI: 10.1515/econ-2022-0021
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    More about this item

    Keywords

    current account imbalances; real exchange-rate misalignment; output gap; Balassa–Samuelson hypothesis; PVAR;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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