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Current account and real exchange rate changes : the impact of trade openness

Author

Listed:
  • Romelli, Davide

    () (Essec business school)

  • Terra, Christina

    (Essec business school)

  • Vasconcelos, Enrico

    (Banco Central do Brasil)

Abstract

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 ac- count 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.

Suggested Citation

  • Romelli, Davide & Terra, Christina & Vasconcelos, Enrico, 2015. "Current account and real exchange rate changes : the impact of trade openness," ESSEC Working Papers WP1520, ESSEC Research Center, ESSEC Business School.
  • Handle: RePEc:ebg:essewp:dr-15020
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    1. repec:spr:series:v:9:y:2018:i:1:d:10.1007_s13209-017-0168-7 is not listed on IDEAS
    2. Michael Bleaney & Mo Tian, 2019. "Flexible exchange rates and current account adjustment," Discussion Papers 2019/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

    More about this item

    Keywords

    trade openness; sudden stops; exchange rate depreciation;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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