The Relationship Between the Real Exchange Rate and Current Account Imbalances in the Eurozone

  • Mark Baimbridge
  • Ioannis Litsios
  • Karen Jackson
  • Uih Ran Lee
Chapter

Abstract

The purpose of this chapter is to examine the current account–real exchange rate nexus for the three eurozone south periphery economies of Greece, Portugal and Spain and reach interesting conclusions on whether economic policies targeting the real exchange rate could be beneficial for improving current account balances in these economies. Evidence suggests that a real depreciation in the periphery (as typified by Greece, Portugal and Spain) can lead to an improvement of these economies’ current account balances.

Bibliography

  1. Alberola, E. and Lopez, H. (2001). Internal and External Exchange Rate Equilibrium in a Co-integration Framework: An Application to the Spanish Peseta. Spanish Economic Review, 3, pp. 23–40.CrossRefGoogle Scholar
  2. Alberola, E., Cervero, S.G., Lopez, H. and Ubide, A. (1999). Global Equilibrium Exchange Rates: Euro, Dollar, ‘Ins’, ‘Outs’ and Other Major Currencies in a Panel Co-integration Framework, IMF Working Paper, No.99/175.Google Scholar
  3. Arghyrou, M.G. and Chortareas, G. (2008). Current Account Imbalances and Real Exchange Rates in the Euro Area. Review of International Economics, 16, pp. 747–764.CrossRefGoogle Scholar
  4. Baxter M and King R. (1999). Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series. Review of Economics and Statistics, 81, pp. 575–593.CrossRefGoogle Scholar
  5. Benassy-Quéré, A., Bèreau, S and Mignon, V. (2009). Robust Estimations of Equilibrium Exchange Rates Within the G20: A Panel BEER Approach. Scottish Journal of Political Economy, 56(5), pp. 608–633.CrossRefGoogle Scholar
  6. Benassy-Quéré, A., Lahrèche-Révil, A. and Mignon, V. (2011). World-Consistent Equilibrium Exchange Rate. Journal of the Japanese and International Economies, 25, pp. 12–32.CrossRefGoogle Scholar
  7. Beveridge S and Nelson C. (1981). A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the Business Cycle. Journal of Monetary Economics, 7, pp. 151–174.CrossRefGoogle Scholar
  8. Boyd, D., Caporale, G.M. and Smith, R. (2001). Real Exchange Rate Effects on the Balance of Trade: Co-integration and the Marshall-Lerner Condition. International Journal of Finance and Economics, 6(3), pp. 187–200.CrossRefGoogle Scholar
  9. Clark, P. and MacDonald, R. (1998). Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEER’s, IMF Working Paper WP98/67.Google Scholar
  10. Driver, R.L. and Westaway, P.F. (2004). Concepts of Equilibrium Exchange Rates, Bank of England, Working Paper No. 248.Google Scholar
  11. Edwards, S. (1989). Real Exchange Rates, Devaluation and Adjustment: Exchange Rate Policy in Developing Countries. MIT Press, Cambridge, MA.Google Scholar
  12. Gnimassoun, B. and Mignon, V. (2013). Current Account Adjustments and Exchange-Rate Misalignments, CEPII, No 29.Google Scholar
  13. Grohé, S., Uribe, M. and Woodford, M. (2016). International Macroeconomics.Google Scholar
  14. Hodrick R, Prescott E. (1981). Post War Business Cycles: An Empirical Investigation, Discussion Paper No. 451, Northwestern University.Google Scholar
  15. Johansen, S. (1995). Likelihood–Based Inference in Cointegrated Vector Autoregressive Models, Advanced Texts in Econometrics. Oxford University Press, Oxford.CrossRefGoogle Scholar
  16. King R and Rebelo S. (1999). Resuscitating Real Business Cycles; in Taylor J. and Woodford M. (eds.) Handbook of Macroeconomics, Volume 1. Elsevier, Amsterdam, The Netherlands, pp. 927–1007.CrossRefGoogle Scholar
  17. Koop G, Pesaran H, Potter S. (1996). Impulse Response Analysis in Nonlinear Multivariate Models. Journal of Econometrics, 74, pp. 119–147.CrossRefGoogle Scholar
  18. Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2012). International Economics. Pearson, New York.Google Scholar
  19. Lane, P.R. and Milesi-Ferretti, G.M. (2012). External Adjustment and the Global Crisis. Journal of International Economics, 882, pp. 252–265.CrossRefGoogle Scholar
  20. Litsios I. and Pilbeam K. (2017). The Long-Run Determination of the Real Exchange Rate: Evidence from an Intertemporal Modelling Framework Using the Dollar-Pound Exchange Rate, Open Economies Review.CrossRefGoogle Scholar
  21. MacDonald, R. (2000). Concepts to Calculate Equilibrium Exchange Rates: An Overview, Deutsche Bundesbank No. 2000, 03.Google Scholar
  22. Pesaran H and Shin Y. (1998). Generalized Impulse Responses in Linear Multivariate Models. Economics Letters, 58, pp. 17–29.CrossRefGoogle Scholar
  23. Pesaran, M.H., Shin, Y. and Smith, R. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 6, pp. 289–326.CrossRefGoogle Scholar
  24. Prescott E. (1986). Theory Ahead of Business Cycle Measurements. Quarterly Review Federal Reserve Bank of Minneapolis, 1986(10), pp. 9–22.Google Scholar
  25. Rogoff, K. (1997). The Purchasing Power Parity Puzzle. Journal of Economic Literature, 34, pp. 647–668.Google Scholar
  26. Sallenave, A. (2010). Real Exchange Rate Misalignment and Economic Performance for the G20 Countries. International Economics, 121, pp. 59–80.CrossRefGoogle Scholar
  27. Sims C. (1980). Macroeconomics and Reality, Econometrica, 48, pp. 1–48.CrossRefGoogle Scholar
  28. Williamson, J. (1994). Estimates of FEERs, in Williamson, ed., Estimating Equilibrium Exchange Rates. Institute for International Economics, Washington DC.Google Scholar

Copyright information

© The Editor(s) (if applicable) and The Author(s) 2017, corrected publication March 2018. 2017

Authors and Affiliations

  • Mark Baimbridge
    • 1
  • Ioannis Litsios
    • 2
  • Karen Jackson
    • 3
  • Uih Ran Lee
    • 4
  1. 1.School of Management University of BradfordBradfordUK
  2. 2.Plymouth Business School University of PlymouthPlymouthUK
  3. 3.Westminster Business School University of WestminsterLondonUK
  4. 4.Department of Economics and Related StudiesUniversity of YorkYorkUK

Personalised recommendations