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Current Accounts and Exchange Rates: A New Look at the Evidence

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  • Greg Leonard
  • Alan C. Stockman

Abstract

This paper 'goes back to basics' in empirical analysis of the J-Curve. First, we document strong violations in the distributional assumptions that underlie nearly all previous work on this issue. Second, we employ distribution-free, non-parametric statistical tests to characterize the data and summarize the key relationships between real exchange rates, the current account, and real GDP. We find some (weak) evidence of a J-Curve in the data. Interestingly, however, we document that this evidence is not consistent with the standard theoretical explanation of the J-Curve. Consequently, our empirical results pose a strong challenge for international economic theory.

Suggested Citation

  • Greg Leonard & Alan C. Stockman, 2001. "Current Accounts and Exchange Rates: A New Look at the Evidence," NBER Working Papers 8361, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8361
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    Cited by:

    1. Michael G. Arghyrou & Georgios Chortareas, 2008. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 747-764, September.
    2. Maria V. Sokolova, 2016. "Exchange Rates, International Trade and Growth: Re-Evaluation of Undervaluation," IHEID Working Papers 05-2016, Economics Section, The Graduate Institute of International Studies.
    3. Holmes Mark J. & Panagiotidis Theodore, 2009. "Cointegration and Asymmetric Adjustment: Some New Evidence Concerning the Behavior of the U.S. Current Account," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-25, June.
    4. Mohsen Bahmani-Oskooee & Charikleia Economidou & Gour Goswami, 2006. "Bilateral J-curve between the UK vis-a-vis her major trading partners," Applied Economics, Taylor & Francis Journals, vol. 38(8), pages 879-888.
    5. Cavallo, Michele & Ghironi, Fabio, 2002. "Net foreign assets and the exchange rate: Redux revived," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 1057-1097, July.
    6. Marques, Luis B, 2007. "The Costs to Consumers of a Depreciated Conversion Rate to the Euro," MPRA Paper 5723, University Library of Munich, Germany.
    7. Elif Akbostanci, 2002. "Dynamics of the trade balance: The Turkish J-curve," ERC Working Papers 0205, ERC - Economic Research Center, Middle East Technical University, revised May 2002.
    8. Olugbenga Onafowora, 2003. "Exchange rate and trade balance in east asia: is there a J-curve?," Economics Bulletin, AccessEcon, vol. 5(18), pages 1-13.
    9. repec:ebl:ecbull:v:5:y:2003:i:18:p:1-13 is not listed on IDEAS
    10. Mohamed Arouri & Arif Billah Dar & Niyati Bhanja & Aviral Kumar Tiwari & FrédéricTeulon, 2014. "Interlinkage between Real Exchange rate and Current Account Behaviors: Evidence from India," Working Papers 2014-88, Department of Research, Ipag Business School.
    11. Cardi, Olivier, 2007. "Another View Of The J-Curve," Macroeconomic Dynamics, Cambridge University Press, vol. 11(2), pages 153-174, April.
    12. CARDI, Oliver & BERTINELLI, Luisito, 2004. "A formal model of krugman’s intuition on the J-curve," LIDAM Discussion Papers CORE 2004043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Ibrahim K. Sule and Mohammed Shuaibu, 2020. "Current Account Behavior, Real Exchange Rate Adjustment and Relative Output in Nigeria," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 45(3), pages 77-99, September.
    14. Gil Kim & Lian An & Yoonbai Kim, 2012. "The behaviour of the real exchange rate and current account," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 5(2), pages 139-160, December.
    15. A H Ahmad & Eric J Pentecost, 2012. "The Current Account and Real Exchange Rate Dynamics in African Countries," Department of Economics Working Papers 4/12, University of Bath, Department of Economics.
    16. Theo Panagiotidis & Mark J Holmes, 2005. "Sustainability and Asymmetric Adjustment: Some New Evidence Concerning Behaviour of the US Current Account," Money Macro and Finance (MMF) Research Group Conference 2005 29, Money Macro and Finance Research Group.
    17. repec:ipg:wpaper:2014-088 is not listed on IDEAS
    18. Adnan Velic, 2024. "Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability," Open Economies Review, Springer, vol. 35(3), pages 497-545, July.
    19. Chayawadee Chai-anant & Ubonrat Jantarang, 2004. "Current Account Adjustment and Policy Instrument Responsiveness," Working Papers 2004-04, Monetary Policy Group, Bank of Thailand.
    20. Jens R Clausen & Magda Kandil, 2009. "On Cyclicality in the Current and Financial Accounts: Evidence from Nine Industrial Countries," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 35(3), pages 338-366.

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    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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