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A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?

  • Menzie D. Chinn
  • Shang-Jin Wei

The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries are included, over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14420.

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Date of creation: Oct 2008
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Publication status: published as Review of Economics and Statistics March 2013, Vol. 95, No. 1, Pages 168-184 Posted Online March 19, 2013. (doi:10.1162/REST_a_00244) © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology A Faith-Based Initiative Meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? Menzie D. Chinn University of Wisconsin, and NBER Shang-Jin Wei Columbia University and NBER
Handle: RePEc:nbr:nberwo:14420
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  1. Barry Eichengreen & Raul Razo-Garcia, 2006. "The international monetary system in the last and next 20 years," Economic Policy, CEPR;CES;MSH, vol. 21(47), pages 393-442, 07.
  2. Flood, Robert P & Rose, Andrew K, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," CEPR Discussion Papers 838, C.E.P.R. Discussion Papers.
  3. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  4. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, September.
  5. Jiandong Ju & Shang-Jin Wei, 2007. "Current Account Adjustment: Some New Theory and Evidence," NBER Working Papers 13388, National Bureau of Economic Research, Inc.
  6. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  7. Menzie D. Chinn, 2005. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," NBER Working Papers 11521, National Bureau of Economic Research, Inc.
  8. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," NBER Working Papers 12925, National Bureau of Economic Research, Inc.
  9. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
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