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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2016, Vol. 11 Issue (4) : 635-667    https://doi.org/10.3868/s060-005-016-0032-3
Orginal Article |
Exchange Rate Flexibility and Current Account Adjustment: A Threshold VAR Analysis
Yu You1(),Zongye Huang2(),Yoonbai Kim3
1. International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China
2. International School of Economics and Management, Capital University of Economics and Business, Beijing 100070, China
3. Department of Economics, University of Kentucky, Lexington, KY 40506-0034, USA
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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     
Issue Date: 20 January 2017
 Cite this article:   
Yu You,Zongye Huang,Yoonbai Kim. Exchange Rate Flexibility and Current Account Adjustment: A Threshold VAR Analysis[J]. Front. Econ. China, 2016, 11(4): 635-667.
 URL:  
http://academic.hep.com.cn/fec/EN/10.3868/s060-005-016-0032-3
http://academic.hep.com.cn/fec/EN/Y2016/V11/I4/635
[1] Shang-Jin Wei,Xiaobo Zhang. The Competitive Saving Motive: Concept, Evidence, and Implications[J]. Front. Econ. China, 2016, 11(3): 355-366.
[2] Yizhong Wang , . The Internal and External Equilibrium Exchange Rate of RMB: 1982–2010[J]. Front. Econ. China, 2010, 5(2): 210-231.
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