Current Account and Real Exchange Rate changes: the impact of trade openness

This article investigates the impact of trade openness on the relationship between current account and real exchange rates, during episodes of sudden stops and of abrupt exchange rate depreciations. Using data for developed and emerging economies for the period 1970--2011, we find that more open economies are associated with lower exchange rate depreciations during sudden stops. We also provide evidence that, during abrupt exchange rate depreciation episodes, economies that are more open to trade experience a larger change in current account and trade balance. In other words, our results indicate that improvements in current account and trade balance are accompanied by a smaller exchange rate depreciation in more open economies. These findings are robust to different measures of openness to trade and methodologies of identifying sudden stops and abrupt exchange rate depreciations.