Working Paper: CEPR ID: DP7076
Authors: Menzie David Chinn; Shangjin Wei
Abstract: The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation.
Keywords: current account imbalances; fixed exchange rate; floating exchange rate; real exchange rate
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate flexibility (F31) | speed of current account reversion (F32) |
| nominal exchange rate regime (F33) | speed of current account adjustment (F32) |
| real exchange rate adjustments (F31) | current account (F32) |
| less flexible nominal exchange rate regimes (F33) | real exchange rate adjustments (F31) |