Current Account Reversals in Industrial Countries: does the Exchange Rate Regime Matter?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. All rights reserved. Terms of use: Documents in ISSN 1725-2806 (online) EU Catalogue NoQB-AR-13-044-EN-N (online)Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors. Abstract This paper studies current account reversals in industrial countries across different exchange rate regimes. There are two major findings which have important implications for industrial economies with external imbalances: first, triggers of current account reversals differ between exchange rate regimes. While the current account deficit and the output gap are significant predictors of reversals across all regimes, reserve coverage, credit booms, openness to trade and the US short term interest rate determine the likelihood of reversals only under more rigid regimes. Conversely, the real exchange rate affects the probability of experiencing a reversal only under flexible arrangements. Second, current account reversals in advanced economies do not have an independent effect on growth. This result holds not only for industrial economies in general but also for countries with fixed exchange rate regimes in particular.Keywords: Current account, reversals, exchange rate regime JEL Classification: F32, F41 Non-Technical SummarySharp external adjustments that lead to a sustained current account improvement are commonly referred to as current account reversals. Reversals have been analyzed intensively in the literature, typically with a focus on the channels through which they are achieved as well as on the question whether they have implications for real economic performance. However, one aspect that has received only limited attention is the relationship between current account reversals and exchange rate regimes, an aspect that is especially timely with regard to the existing external imbalances within the Euro area. The present paper contributes to this strand of the literature by presenting a systematic analysis of current account reversals across different de-facto exchange rate regimes in industrial countries. In particular, it examines whether current account reversals follow different patterns depending on the exchange rate regime in place.Moreover, it identifies triggers of reversals and examines the link between reversals and growth across different exchange rate regimes. The analysis focuses precisely on...

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