Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability

Adnan Velic

Economic Papers from Trinity College Dublin, Economics Department

Abstract: This paper analyzes the bivariate relation between large current account imbalances and the real exchange rate over different degrees of nominal exchange rate variability. Employing both linear and nonlinear panel estimation procedures, we find an inverse link between large imbalances and the real exchange rate at lower nominal exchange rate rigidity levels. This is in contrast to the often non-existent or positive comovement that materializes under regimes entailing lower nominal exchange rate variation. Our results thus suggest that greater nominal exchange rate adjustment can induce a stabilizing current account-real exchange rate relation. Along the cross-section, the most salient findings are i) the striking positive relation between current account persistence and real exchange rate persistence based on country-specific estimates and ii) the inverse correlation between persistence in either the current account or real exchange rate and nominal exchange rate volatility.

Keywords: external imbalances; current account adjustment; real exchange rate; nominal exchange rate volatility; flexibility; persistence (search for similar items in EconPapers)
JEL-codes: F00 F31 F32 F41 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-05, Revised 2021-10
New Economics Papers: this item is included in nep-cba and nep-opm
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https://www.tcd.ie/Economics/TEP/2017/TEP1417.pdf

Related works:
Journal Article: Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep1417

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