A Faith-Based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?

53 Pages Posted: 23 Oct 2008 Last revised: 27 Nov 2022

See all articles by Menzie David Chinn

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: October 2008

Abstract

The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries are included, over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation.

Suggested Citation

Chinn, Menzie David and Wei, Shang-Jin, A Faith-Based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? (October 2008). NBER Working Paper No. w14420, Available at SSRN: https://ssrn.com/abstract=1288419

Menzie David Chinn (Contact Author)

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

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Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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