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| Title: | | External stability, real exchange rate adjustment and the exchange rate regime in emerging-market economies  |
| Authors: | | Gervais, Olivier Schembri, Lawrence Suchanek, Lena |
| Issue Date: | | 2011 |
| Series/Report no.: | | Bank of Canada Discussion Paper 2011-5 |
| Abstract: | | In emerging-market economies, real exchange rate adjustment is critical for maintaining a sustainable current account position and thereby for helping to reduce macroeconomic and financial instability. The authors examine empirically two related hypotheses: (i) that real exchange rate flexibility and adjustment promotes external stability, and (ii) that a flexible nominal exchange rate facilitates real exchange rate adjustment. Based on an event-study analysis for a large set of emerging-market economies over the period 1975-2008, the authors find that real exchange rate adjustment has contributed significantly to reducing current account imbalances. The adjustment of current account deficits in countries with a fixed exchange rate regime does not typically occur through the classical adjustment mechanism, but as a consequence of exchange rate crises, where the nominal exchange rate collapses and there are substantial costs in terms of forgone output. Vector-error-correction results support the findings of the event study; namely, in the long run the real exchange rate movements facilitate current account adjustment. |
| Subjects: | | Exchange rate regimes International topics Development economics |
| JEL: | | F31 F32 F41 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Bank of Canada Discussion Papers
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