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Exchange rate regimes and current account adjustment: An empirical investigation

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  • Eguren Martin, Fernando

Abstract

The acceleration in the formation of global imbalances in the period preceding the last financial crisis prompted a revival of the debate on whether exchange rate regimes affect the flexibility of the current account (i.e. its degree of mean reversion), as originally proposed by Friedman (1953). I analyse this relation systematically using a panel of 180 countries over the 1960–2007 period. I find robust evidence that flexible exchange rate arrangements deliver a faster current account adjustment among non-industrial countries. Additionally, I try to identify channels through which this effect could be taking place. The results suggest that exports respond to expenditure-switching behaviour by consumers when faced with changes in international relative prices, configuring a potential channel.

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  • Eguren Martin, Fernando, 2016. "Exchange rate regimes and current account adjustment: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 69-93.
    • Handle: RePEc:eee:jimfin:v:65:y:2016:i:c:p:69-93
    DOI: 10.1016/j.jimonfin.2016.03.006
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    7. Alberto Fuertes, 2019. "Exchange rate regime and external adjustment: An empirical investigation for the US," The World Economy, Wiley Blackwell, vol. 42(5), pages 1373-1399, May.
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    12. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
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    14. Mr. Yan Carriere-Swallow & Mr. Nicolas E Magud & Juan Yepez, 2018. "No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect," IMF Working Papers 2018/213, International Monetary Fund.
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    16. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    18. Habimana, Olivier, 2018. "Asymmetry and Multiscale Dynamics in Macroeconomic Time Series Analysis," MPRA Paper 87823, University Library of Munich, Germany.
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    More about this item

    Keywords

    Exchange rate regimes; Current account imbalances; External adjustment;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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