 Impact of Exchange Rate Flexibility on Current Account Rebalancing - with a Focus on International Capital Flows (in Korean)Geun-Young Kim ()
No 2014-17, Working Papers from Economic Research Institute, Bank of Korea Abstract: Despite the growing attention since the global financial crisis to the role of exchange rate flexibility in global rebalancing, few empirical studies have examined whether a more flexible exchange rate actually helps mitigate global imbalances. Furthermore it is becoming ever more important to consider the active roles of international capital flows, which have been increasing sharply since the 1990's. Against this backdrop, this paper conducts an empirical analysis of the relationship between current account rebalancing and exchange rate flexibility with a particular focus on the role of international capital flows. The results show, firstly, that a more flexible exchange rate de facto helps adjust current account deficits or surpluses significantly. Secondly, greater exchange rate flexibility also encourages inflows of portfolio and other investments, leading to offsetting effects that lower the probability of current account adjustment. This finding implies that foreign capital inflows tend to finance deficits in current-account deficit countries, while helping promote productivity in tradable sectors in current account surplus countries. Thirdly, in countries with more flexible exchange rates, the marginal effect of facilitating current account deficit adjustment and capital inflows is smaller; that is, there exist non-linear effects in the role of exchange rate flexibility. Lastly, if the probability of current account surplus adjustment is higher, foreign portfolio investment tends to flow out significantly, but, there is no such systematic relationship in the case of current account deficit adjustment. These results suggest that greater exchange rate flexibility may not always enhance current account rebalancing, and utilizing foreign capital inflows efficiently is crucial in achieving a sound and resilient macro economy. Keywords: Financial Flows; Current Account Adjustment; Exchange Rate Flexibility; Global Rebalancing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1417 Access Statistics for this paper More papers in Working Papers from Economic Research Institute, Bank of Korea Contact information at EDIRC. |
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