 Current account dynamics, real exchange rate adjustment, and the exchange rate regime in emerging-market economiesOlivier Gervais, Lawrence Schembri () and Lena Suchanek Journal of Development Economics, 2016, vol. 119, issue C, 86-99 Abstract: In emerging-market economies, real exchange rate adjustment is critical for achieving a sustainable current account position and thereby for helping to maintain macroeconomic and financial stability. This study examines two related hypotheses: (i) that real exchange rate adjustment promotes the rebalancing of the current account and (ii) that a flexible nominal exchange rate facilitates real exchange rate adjustment and thus the rebalancing of the current account. Evidence from an event-study analysis for a large set of emerging-market economies over the period 1975–2008 indicates that real exchange rate adjustment has contributed significantly to reducing current account imbalances. The adjustment of current account deficits in countries with a fixed exchange rate regime typically occurs through an exchange rate crisis, and substantial costs in terms of forgone output are incurred. Vector-error-correction analysis supports the findings of the event study; namely, in the long run, real exchange rate movements facilitate current account adjustment. Keywords: Exchange rate regimes; Current account adjustment; Emerging market economies (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:eee:deveco:v:119:y:2016:i:c:p:86-99 DOI: 10.1016/j.jdeveco.2015.10.003 Access Statistics for this article Journal of Development Economics is currently edited by M. R. Rosenzweig More articles in Journal of Development Economics from Elsevier |
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