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

39 Pages Posted: 24 May 2014 Last revised: 22 Jul 2018

See all articles by Davide Romelli

Davide Romelli

Trinity College (Dublin) - Department of Economics

Cristina Terra

ESSEC Business School; University of Cergy-Pontoise - THEMA

Enrico Vasconcelos

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: September 29, 2015

Abstract

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.

Keywords: trade openness, sudden stops, real exchange rate depreciation

JEL Classification: F32, F37

Suggested Citation

Romelli, Davide and Terra, Cristina and Vasconcelos, Enrico, Current account and real exchange rate changes: The impact of trade openness (September 29, 2015). European Economic Review, Vol. 105, No. June, 2018; ESSEC Working Paper 1520. Available at SSRN: https://ssrn.com/abstract=2439832 or http://dx.doi.org/10.2139/ssrn.2439832

Davide Romelli (Contact Author)

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

Cristina Terra

ESSEC Business School ( email )

95021 Cergy-Pontoise Cedex
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Enrico Vasconcelos

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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