NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Menzie D. Chinn, Shang-Jin Wei

NBER Working Paper No. 14420
Issued in October 2008
NBER Program(s):   IFM

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.

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This paper was revised on December 23, 2011

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Document Object Identifier (DOI): 10.3386/w14420

Published: Review of Economics and Statistics March 2013, Vol. 95, No. 1, Pages 168-184 Posted Online March 19, 2013. (doi:10.1162/REST_a_00244) © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology A Faith-Based Initiative Meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? Menzie D. Chinn University of Wisconsin, and NBER Shang-Jin Wei Columbia University and NBER

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