Current Account and Real Exchange Rate changes: the Impact of Trade Openness

Davide Romelli, Cristina Terra and Enrico Vasconcelos
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Enrico Vasconcelos: Banco Central do Brasil

No 2014-10, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: In the transfer problem debate with Keynes, Ohlin suggests that income effects should lessen relative price variations necessary to produce trade surpluses, and that that impact is related to the degree of openness of the economy. We illustrate this mechanism in a simple model, and take it to the data. First, using data for developed and emerging economies for the period 1970{2011, we identify events of sudden stops of capital flows and of abrupt real exchange rate depreciations. Then, we investigate the relationship between openness to trade, real exchange rate depreciations, and changes in current account and trade balances during these events. We find that, controlling for real exchange rate changes, more open economies experience a larger increase in current account and trade balances. In other words, our results indicate that improvements in current account and trade balances are accompanied by a smaller real exchange rate depreciation in more open economies.

Keywords: trade openness; sudden stops; real exchange rate depreciation. (search for similar items in EconPapers)
JEL-codes: F32 F37 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Current account and real exchange rate changes: The impact of trade openness (2018)
Working Paper: Current Account and Real Exchange Rate changes: the impact of trade openness (2016)
Working Paper: Current account and real exchange rate changes: the impact of trade openness (2015)
Working Paper: Current Account and Real Exchange Rate Changes: The Impact of Trade Openness (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2014-10

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