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Current Account and Real Exchange Rate changes: the Impact of Trade Openness

  • Davide Romelli

    ()

    (Université de Cergy-Pontoise, THEMA and ESSEC Business School)

  • Cristina Terra

    (Université de Cergy-Pontoise, THEMA and CEPII)

  • Enrico Vasconcelos

    (Banco Central do Brasil)

In the transfer problem debate with Keynes, Ohlin suggests that income effects should lessen relative price variations necessary to produce trade surpluses, and that that impact is related to the degree of openness of the economy. We illustrate this mechanism in a simple model, and take it to the data. First, using data for developed and emerging economies for the period 1970{2011, we identify events of sudden stops of capital flows and of abrupt real exchange rate depreciations. Then, we investigate the relationship between openness to trade, real exchange rate depreciations, and changes in current account and trade balances during these events. We find that, controlling for real exchange rate changes, more open economies experience a larger increase in current account and trade balances. In other words, our results indicate that improvements in current account and trade balances are accompanied by a smaller real exchange rate depreciation in more open economies.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2014-10.

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Date of creation: 2014
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Handle: RePEc:ema:worpap:2014-10
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