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Home > Research > Staff Working Paper No. 544: Exchange rate regimes and current account adjustment: an empirical investigation - Fernando Eguren-Martín
 

Staff Working Paper No. 544: Exchange rate regimes and current account adjustment: an empirical investigation - Fernando Eguren-Martín

21 August 2015

Staff Working Paper No. 544: Exchange rate regimes and current account adjustment: an empirical investigation
Fernando Egurne-Martín

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.

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