Exchange Rate Regimes and Current Account Adjustment: An Empirical Investigation
32 Pages Posted: 25 Aug 2015
Date Written: August 21, 2015
The acceleration in the formation of global imbalances in the period preceding the last financial crisis prompted a revival of the debate on whether exchange rate regimes affect the flexibility of the current account (ie its degree of mean reversion), as originally proposed by Friedman (1953). I analyse this relation systematically using a panel of 180 countries over the 1960-2007 period. In contrast to pioneering work on the subject, I find robust evidence that flexible exchange rate arrangements do deliver a faster current account adjustment among non-industrial countries. Additionally, I try to identify channels through which this effect could be taking place. Evidence suggests that exports respond to expenditure-switching behaviour by consumers when faced with changes in international relative prices. There is mixed evidence of credit acting as an additional avenue of influence.
Keywords: External dynamics, exchange rate regimes, current account imbalances.
JEL Classification: F31, F32, F33, F41.
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