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Do flexible exchange rates facilitate external adjustment? A dynamic approach with time-varying and asymmetric volatility

Olivier Habimana

International Economics and Economic Policy, 2017, vol. 14, issue 4, No 5, 625-642

Abstract: Abstract This paper revisits the claim that flexible exchange rates facilitate external adjustment. While previous studies have used exchange rate regime as a proxy for exchange rate flexibility, in this study there is evidence of ARCH effects in exchange rate, and thus GARCH models are employed to estimate volatility. A dynamic panel data model is then specified, and the Arellano-Bond estimator and the Blundell-Bond estimator are employed to estimate the effect of exchange rate flexibility on the speed of adjustment of current account in a panel of 28 emerging and developing economies. There is robust evidence that flexible exchange rates indeed facilitate smoother adjustment of current account imbalances.

Keywords: Arellano-Bond estimator; Current account adjustment; Exchange rate volatility; Flexible exchange rates; GARCH; Leverage effect (search for similar items in EconPapers)
JEL-codes: C33 F31 F32 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10368-016-0341-7

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