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Does the exchange rate regime influence the relationship between the output gap and the current account?

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  • Darrin Downes
  • Winston Moore

Abstract

Estimates of the output gap are useful for identifying the sustainable level of noninflationary output growth in countries with a flexible exchange rate regime. For nations with a fixed exchange rate, however, domestic prices are inexorably linked to the prices of its main trading partners and are unlikely to bear little relation to the output gap. This article uses data on 45 developed and developing countries between 1970 and 2004 to show that a positive output gap in a country with a fixed exchange rate is more liable to be reflected in an imbalance on the external current account.

Suggested Citation

  • Darrin Downes & Winston Moore, 2007. "Does the exchange rate regime influence the relationship between the output gap and the current account?," Applied Economics, Taylor & Francis Journals, vol. 39(15), pages 1955-1960.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:15:p:1955-1960
    DOI: 10.1080/00036840600707035
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    References listed on IDEAS

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    1. Odile Chagny & Jörg Döpke, 2001. "Measures of the Output Gap in the Euro-Zone: An Empirical Assessment of Selected Methods," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(3), pages 310-332.
    2. Paolo Guarda, 2002. "Potential output and the output gap in Luxembourg: some alternative methods," BCL working papers 4, Central Bank of Luxembourg.
    3. Charles Bronowski & Juann H. Hung, 2002. "Modeling the U.S. Current Account as the Savings-Investment Balance: Technical Paper 2002-5," Working Papers 14224, Congressional Budget Office.
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