Persistence of Current-account Disequilibria and Real Exchange-rate Misalignments

Blaise Gnimassoun and Valérie Mignon ()

Review of International Economics, 2015, vol. 23, issue 1, 137-159

Abstract: This paper aims at studying whether the persistence of the gap between the observed current-account position and its equilibrium value nonlinearly depends on real exchange-rate misalignments. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we find evidence for this hypothesis, showing that persistence of current-account imbalances strongly depends on the deviation of the real exchange rate from its long-term equilibrium. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non-eurozone members.

Date: 2015
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