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Effective exchange rates, current accounts and global imbalances

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  • Beckmann, Joscha
  • Czudaj, Robert
Abstract
This study analyzes the dynamics between real effective exchange rates and current accounts from a novel perspective. We start by dissecting long-run and time-varying short-run dynamics as well as causalities between both variables. Following this, we extend our framework by including short-term interest rates. Finally, we examine common exchange rate and current account dynamics across countries based on common factors. Our results show that a real appreciation coincides with a worsening of the current account in most cases. The adjustment pattern is time-varying but suggests that the causality mainly runs from effective exchange rates to current accounts. However, an extension of our framework based on monthly data shows that trade balance adjustment is observed less frequently, suggesting that valuation effects play an important role for the relationship between current accounts and exchange rates. From a global point of view, cross-country trends which drive exchange rates and current accounts also share similar dynamics over the long-run, which is an important finding in the context of global imbalances.

Suggested Citation

  • Beckmann, Joscha & Czudaj, Robert, 2016. "Effective exchange rates, current accounts and global imbalances," Ruhr Economic Papers 610, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:610
    DOI: 10.4419/86788707
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    More about this item

    Keywords

    current account; global imbalances; Markov-switching; multivariate cointegration; real exchange rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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