Exchange rate regime and external adjustment: An empirical investigation for the US

This paper analyses the relationship between the US net external position and the exchange rate regime. I find a structural break in the US net external position at the end of the Bretton Woods system of fixed exchange rates that changed both the mean and variance of the series. On average, the US changed from a creditor to a debtor position and the variance of the external position increased during the floating period. This increase is to a large extent due to the valuation component of external adjustment that accounts for 54% of the variance of the US external position during the floating period but only 29% during the fixed exchange rate period. Further analysis shows that the exchange rate regime mainly affects the valuation channel of external adjustment. There is also evidence of another structural break in the US external position around the time of the introduction of the euro. Finally, I document asset pricing implications from the relationship between the exchange rate regime and the external adjustment process, as external imbalances predict the foreign exchange once the exchange rate regime is taken into account.