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Current-Account Adjustments and Exchange-Rate Misalignments

  • Blaise Gnimassoun
  • Valérie Mignon

This paper aims at studying current-account imbalances by paying a particular attention to exchange-rate misalignments. We rely on a nonlinear model linking the persistence of current account imbalances to the deviation of the exchange rate to its equilibrium value. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we show that persistence of current-account imbalances strongly depends on currency misalignments. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non-eurozone members.

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Paper provided by CEPII research center in its series Working Papers with number 2013-29.

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Date of creation: Sep 2013
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Handle: RePEc:cii:cepidt:2013-29
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