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Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability

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  • Adnan Velic

    (Technological University Dublin)

Abstract

This paper globally analyzes the bivariate relation between large current account imbalances and the real exchange rate over different degrees of nominal exchange rate variability. Employing both linear and nonlinear panel estimation procedures, we typically find an inverse long-run link between large imbalances and the real exchange rate at lower nominal exchange rate rigidity levels. This is in contrast to the often non-existent or positive comovement that materializes under lower nominal exchange rate variation. Our results thus suggest that greater nominal exchange rate adjustment can induce a stabilizing “current account”-“real exchange rate” relation. Meanwhile, current account adjustment speeds up with more flexible nominal exchange rates. Along the cross-section, the most salient findings are i) the striking positive relation between current account persistence and real exchange rate persistence based on country-specific estimates and ii) the inverse correlation between persistence in either the current account or real exchange rate and nominal exchange rate volatility.

Suggested Citation

  • Adnan Velic, 2024. "Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability," Open Economies Review, Springer, vol. 35(3), pages 497-545, July.
    • Handle: RePEc:kap:openec:v:35:y:2024:i:3:d:10.1007_s11079-022-09673-7
    DOI: 10.1007/s11079-022-09673-7
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    More about this item

    Keywords

    External imbalances; Current account adjustment; Real exchange rate; Nominal exchange rate volatility; Flexibility; Persistence;
    All these keywords.

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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