Macroeconomic Policy Making, Exchange Rate Adjustment and Current Account Imbalances in Emerging Markets

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. Since a series of crisis events after 2007, the discussion about the adjustment channels of current account imbalances has been revived. We discuss the effectiveness of exchange rates versus macroeconomic policies to rebalance current accounts for a set of 86 mainly emerging market economies. We find that nominal exchange rates are not a sufficient adjustment channel for (unsustainable) current account positions. Instead, depending on the region, monetary and/or fiscal policies are the main determinants of current accounts. For East Asia and the oil exporting countries sterilization policies, i.e. relatively tight monetary policies, are the main determinants. In contrast the main driving forces for emerging and southern Europe are fiscal policy stances. Only for the Latin American countries the exchange rate seems to play a significant role. Terms of use: Documents inJEL-Code: F430, E420, F310.

Determinants of the Current Account Balances among Central and Eastern European Countries in the European Union

“…The improvement in government budget balance has a positive effect on their current account balance. In contrast, the expansionary (tight) fiscal policy followed by interest rate cuts would lead to their current account deficits (improvement) 10 …”

Country Economic Memorandum for Sao Tome and Principe - Background Note 2

“…The counter-intuitive response of the trade balance to the real appreciation of the dobra suggests that the current account deficit is not being driven by declining international trade competitiveness, but rather by STP's fiscal deficits, which are in turn enabled by foreign aid flows. This causality is common among EMDEs (Chinn andPrasad 2003, Duarte andSchnabl 2015).…”

“…Although not conclusive, the evidence suggests that an overvalued exchange rate and a trade deficit are not the main drivers of STP's current account deficit. The current account in EMDEs is often not determined by the trade balance, instead being a function of fiscal deficits (Chinn andPrasad 2003, Duarte andSchnabl 2015). STP's fiscal deficits are, in turn, financed largely by aid inflows.…”

The Case for a Single Currency

“…Sarno and Schmeling found that those exchange rates drove interest rates, inflation, money balances, and GDP. Zhang and MacDonald [25] claimed a negative long-term relationship between exchange rates and trade imbalances exists while Duarte and Schnabl maintained that exchange rates do not cause trade imbalances but, rather, imbalances are caused by poor monetary and fiscal policy at least in emerging markets [26].…”