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Do flexible exchange rates facilitate external adjustment? A dynamic approach with time-varying and asymmetric volatility
Jönköping University, Jönköping International Business School, JIBS, Economics. Department of Applied Statistics, College of Business and Economics, University of Rwanda, Kigali, Rwanda.
2016 (English)In: International Economics and Economic Policy, ISSN 1612-4804, E-ISSN 1612-4812Article in journal (Refereed) Epub ahead of print
Abstract [en]

This paper revisits the claim that flexible exchange rates facilitate external adjustment. While previous studies have used exchange rate regime as a proxy for exchange rate flexibility, in this study there is evidence of ARCH effects in exchange rate, and thus GARCH models are employed to estimate volatility. A dynamic panel data model is then specified, and the Arellano-Bond estimator and the Blundell-Bond estimator are employed to estimate the effect of exchange rate flexibility on the speed of adjustment of current account in a panel of 28 emerging and developing economies. There is robust evidence that flexible exchange rates indeed facilitate smoother adjustment of current account imbalances.

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Keyword [en]
Arellano-Bond estimator, Current account adjustment, Exchange rate volatility, Flexible exchange rates, GARCH, Leverage effect
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URN: urn:nbn:se:hj:diva-34621DOI: 10.1007/s10368-016-0341-7ScopusID: 2-s2.0-84966312491OAI: diva2:1062254
Available from: 2017-01-05 Created: 2017-01-05 Last updated: 2017-01-05

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Habimana, Olivier
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