Exchange Rate Flexibility and Current Account Adjustment¡ªA Threshold VAR Analysis

Yu You, Yoonbai Kim and Zongye Huang
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Yoonbai Kim: Department of Economics, University of Kentucky, Lexington, KY 40506-0034, USA

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2016, vol. 11, issue 4, 635-667

Abstract: Global imbalances (current account imbalances) have become an important issue for economists and policy makers. Greater exchange rate flexibility is often suggested as a means to achieve faster and more efficient adjustment in the current account. However, previous empirical studies show little support for this hypothesis. This paper revisits this issue with a large panel dataset and a threshold VAR model and finds that (1) some existing popular exchange rate classifications may not capture actual exchange rate variability as well as expected; (2) Once exchange rate variability is correctly identified, the speed of mean reversion in the current account balance is indeed higher in a regime with greater exchange rate variability.

Keywords: global imbalances; current account; exchange rate regimes; threshold VAR (search for similar items in EconPapers)
JEL-codes: F31 F32 F33 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:11:y:2016:i:4:p:635-667

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