Exchange Rate Flexibility and Current Account Adjustment: A Threshold VAR Analysis

Yu You, Yoonbai Kim, Zongye Huang

Research output: Contribution to journalArticlepeer-review


Global imbalances (current account imbalances) have become an important issue for economists and policy makers. Greater exchange rate flexibility is often suggested as a means to achieve faster and more efficient adjustment in the current account. However, previous empirical studies show little support for this hypothesis. This paper revisits this issue with a large panel dataset and a threshold VAR model and finds that (1) some existing popular exchange rate classifications may not capture actual exchange rate variability as well as expected; (2) Once exchange rate variability is correctly identified, the speed of mean reversion in the current account balance is indeed higher in a regime with greater exchange rate variability.

Original languageEnglish
Pages (from-to)635-667
Number of pages33
JournalFrontiers of Economics in China
Issue number4
StatePublished - Dec 2016

Bibliographical note

Funding Information:
Acknowledgements I would like to thank Ngo Van Long, Markus Poschke, Kevin Huang, two anonymous referees, as well as seminar and conference participants from various institutions for their valuable comments and suggestions. And I gratefully acknowledge the financial support from the Humanities and Social Science Research Project of the Ministry of Education of the People’s Republic of China (Project No. 16YJC790035), and the Research and Innovation Centre of Metropolis Economic and Social Development at Capital University of Economics and Business.

Publisher Copyright:
© 2016 Higher Education Press Limited Company. All rights reserved.


  • current account
  • exchange rate regimes
  • global imbalances
  • threshold VAR

ASJC Scopus subject areas

  • Economics and Econometrics


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