Yu You,Zongye Huang,Yoonbai Kim

Author information

a International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China

b International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China

c Department of Economics, University of Kentucky, Lexington, KY 40506-0034, USA

E-mail: f91yy@163.com (Yu You), f91yy@163.com (Zongye Huang)

Abstract

Global imbalances (current account imbalances) have become an important issue for economists and policy makers. Greater exchange rate flexibility is often suggested as a means to achieve faster and more efficient adjustment in the current account. However, previous empirical studies show little support for this hypothesis. This paper revisits this issue with a large panel dataset and a threshold VAR model and finds that (1) some existing popular exchange rate classifications may not capture actual exchange rate variability as well as expected; (2) Once exchange rate variability is correctly identified, the speed of mean reversion in the current account balance is indeed higher in a regime with greater exchange rate variability.

Keywords

global imbalances, current account, exchange rate regimes, threshold VAR

Cite this article

Yu You, Zongye Huang, Yoonbai Kim. Exchange Rate Flexibility and Current Account Adjustment: A Threshold VAR Analysis. Front. Econ. China, 2016, 11(4): 635‒667 https://doi.org/10.3868/s060-005-016-0032-3