Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/66934 
Year of Publication: 
2011
Series/Report no.: 
Bank of Canada Discussion Paper No. 2011-5
Publisher: 
Bank of Canada, Ottawa
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
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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