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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.

Suggested Citation

  • 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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    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Hamid Raza & Gylfi Zoega & Stephen Kinsella, 2017. "Capital inflows, crisis and recovery in small open economies," Birkbeck Working Papers in Economics and Finance 1709, Birkbeck, Department of Economics, Mathematics & Statistics.
    3. Alberto Fuertes, 2017. "Exchange rate regime and external adjustment: an empirical investigation for the U.S," Working Papers 1717, Banco de España;Working Papers Homepage.
    4. 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.
    5. Gudmundsson, Gudmundur S. & Zoega, Gylfi, 2016. "A double-edged sword: High interest rates in capital control regimes," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-38.
    6. Michael F. Bleaney & Mo Tian & Lin Yin, 2017. "De Facto Exchange Rate Regime Classifications: An Evaluation," Open Economies Review, Springer, vol. 28(2), pages 369-382, April.
    7. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.

    More about this item

    Keywords

    Exchange rate regimes; Current account imbalances; External adjustment;

    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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