EMPIRICAL ANALYSIS OF CURRENT ACCOUNT ADJUSTMENTS AT FIXED EXCHANGE RATES

Jean Le Pavec
Additional contact information
Jean Le Pavec: Direction Générale du Trésor

Working Papers from HAL

Abstract: Current account imbalances of euro area member countries widened during the period 2000-08 and remain at a very high level today, despite some improvements after 2008. High current account deficits usually reflect an overvalued real effective exchange rate which undermines competitiveness. For countries with floating exchange rates, competitiveness can be improved through a depreciation of the nominal exchange rate. Countries with pegged exchange rate can decide to devaluate their currencies. On the contrary, for countries belonging to monetary unions or countries with pegged currency that do not want to devaluate their currency, the adjustment process has to rely mostly on an internal devaluation (depreciation of domestic prices). In this paper, we devise a methodology to identify current account adjustment episodes for countries under fixed exchange rates. We apply our methodology to a large set of 191 economies between 1980 and 2010, which enables us to identify 38 current account adjustment episodes during this period. We then classify these episodes into three categories labeled "forced adjustment", "autonomous adjustment" and "supported adjustment" depending on the relative role of external factors (market pressure, external demand, evolution of the terms of trade) and the type of domestic policies implemented to foster current account adjustment (policy mix and structural adjustments). Our work offers some conclusions for the current Euro area crisis. Regarding structural reforms in peripheral Europe, product market regulation seems to be in line with the OECD average (except for Greece), whereas employment regulation is more protective in these countries. In our sample, successful current account adjustments, driven by gains in competitiveness through wage moderation policies, are typically of long duration. These results call for international coordination to lengthen the period for adjustment in peripheral Europe in order to allow structural reforms to gradually bear fruit and to result in a more progressive rebalancing. Such cooperation would reduce the need for short-term policy actions, in response to financial stress, and the pertaining social costs.

Date: 2013-09-01
References: Add references at CitEc
Citations:

Published in Banca d'Italia. 2013

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05757845

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().