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

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  • Olivier Habimana

    (Jönköping International Business School, Jönköping University
    College of Business and Economics, University of Rwanda)

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.

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  • Olivier Habimana, 2017. "Do flexible exchange rates facilitate external adjustment? A dynamic approach with time-varying and asymmetric volatility," International Economics and Economic Policy, Springer, vol. 14(4), pages 625-642, October.
    • Handle: RePEc:kap:iecepo:v:14:y:2017:i:4:d:10.1007_s10368-016-0341-7
    DOI: 10.1007/s10368-016-0341-7
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    More about this item

    Keywords

    Arellano-Bond estimator; Current account adjustment; Exchange rate volatility; Flexible exchange rates; GARCH; Leverage effect;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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