The Role of the Exchange Rate for Adjustment in Boom and Bust Episodes

37 Pages Posted: 27 Sep 2007

See all articles by Reiner Martin

Reiner Martin

Joint Vienna Insitute; European Central Bank (ECB)

Ludger Schuknecht

European Central Bank (ECB)

Isabel Vansteenkiste

European Central Bank (ECB)

Date Written: September 2007

Abstract

Numerous countries have experienced boom-bust episodes in asset prices in the past 20 years. This study looks at stylized facts and conducts statistical and econometric analysis for such episodes, distinguishing between industrialized countries that experienced external adjustment (via real effective exchange rate depreciation during busts) and those that relied on an internal adjustment process (and experienced no depreciation). The study finds that different adjustment experiences are correlated with the degree of macroeconomic imbalances and balance sheet problems. Internal adjustment seems more prevalent when financial vulnerabilities, excess demand and competitiveness loss remain relatively contained in the boom. In the bust, internal adjusters experience more protracted but less deep downturns than external adjusters as imbalances unwind more slowly. Some Central and East European EU Member States are currently experiencing strong credit and asset price growth in conjunction with rapid economic expansion. Against this background the experience of other countries may raise awareness of related policy challenges.

Keywords: Booms and busts, external and internal adjustment, exchange rates, financial imbalances, competitiveness

JEL Classification: E32, E63, E65

Suggested Citation

Martin, Reiner and Schuknecht, Ludger and Vansteenkiste, Isabel, The Role of the Exchange Rate for Adjustment in Boom and Bust Episodes (September 2007). ECB Working Paper No. 813, Available at SSRN: https://ssrn.com/abstract=1015256

Reiner Martin (Contact Author)

Joint Vienna Insitute ( email )

Mariahilferstrasse 97
Wien, A-1090
Austria

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ludger Schuknecht

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6494 (Phone)
+49 69 1344 7809 (Fax)

Isabel Vansteenkiste

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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