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A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?

Shang-Jin Wei and Menzie Chinn

No 7076, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation.

Keywords: Current account imbalances; Fixed exchange rate; Floating exchange rate; Real exchange rate (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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Citations: View citations in EconPapers (62)

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Working Paper: A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? (2009) Downloads
Working Paper: A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? (2008) Downloads
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