Current-Account Imbalances, Real Exchange-Rate Misalignments, and Output Gaps

Camba-Crespo Alfonso (), García-Solanes José () and Torrejón-Flores Fernando ()
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Camba-Crespo Alfonso: International Doctorate School, UNED, Madrid 28040, Spain
García-Solanes José: Department of Economic Analysis, Murcia University, Spain
Torrejón-Flores Fernando: Department of Applied Economics, Murcia University, Spain

Economics - The Open-Access, Open-Assessment Journal, 2022, vol. 16, issue 1, 57-72

Abstract: This study analyzes the relationships between domestic and foreign output gaps, current-account imbalances, and real effective exchange-rate (REER) misalignments. We first set up a theoretical framework based on the elasticities and absorption approaches of the balance of payments to derive and clarify these relationships. Next, we perform panel VAR estimates in a sample of 18 advanced economies between 1986 and 2017. We find an inverse relationship between domestic output gaps and current accounts with reciprocal influences between the two variables. Moreover, we observe that increases in current accounts generally boost both temporary and structural growth. Additionally, our results indicate that REER misalignment shocks cause reactions of the opposite sign on the current account and on cyclical economic growth. We also find evidence of higher growth resulting in a real exchange-rate appreciation, which supports the Balassa–Samuelson hypothesis.

Keywords: current account imbalances; real exchange-rate misalignment; output gap; Balassa–Samuelson hypothesis; PVAR (search for similar items in EconPapers)
JEL-codes: F32 F41 F47 F49 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:econoa:v:16:y:2022:i:1:p:57-72:n:2

DOI: 10.1515/econ-2022-0021

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