 Balance of payments accounting and exchange rate dynamicsInternational Review of Economics & Finance, 2010, vol. 19, issue 1, 46-63 Abstract: The balance of payments is an accounting identity. Many wonder how the current and capital accounts, which add up to zero, can influence exchange rates. This paper shows how payment flows arising from balance of payments imbalances affect the demands for different currencies in the foreign exchange market over time. Based on a dynamical system approach, the paper demonstrates how international payments evolve depending on the joint dynamic behaviour of different balance of payments components. It finds that international payments and exchange rates interact in fundamentally different ways depending on whether a country restricts its capital inflows and outflows, whether capital flows are accommodating or autonomous and whether the exchange rate is fixed, flexible or, say, governed by a crawling peg. Empirical evidence from major industrial countries as well as from countries hit by currency crises support the paper's theoretical predictions. Keywords: Balance; of; payments; accounting; Exchange; rate; determination; Capital; flows; Currency; crises (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:reveco:v:19:y:2010:i:1:p:46-63 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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