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CURRENT ACCOUNT ADJUSTMENT IN DEVELOPING COUNTRIES: THE ROLE OF EXCHANGE RATE REGIMES

Authors

  • XIAOYI MU,

    1. Mu: Senior Lecturer, Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Carnegie Building, Dundee, DD1 4HN, UK. Phone 44(0)1382-384843, Fax 44(0)1382-384854, E-mail x.mu@dundee.ac.uk
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  • HAICHUN YE

    1. Ye: Associate Professor, School of Economics, Shanghai University of Finance and Economics, Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, 777 Guoding Road, Shanghai 200433, China. Phone +86-21-35304427, Fax +86-21-65903224, E-mail haichunye@gmail.com
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    • An earlier version of the article was presented in the economics departments at the University of Colorado Denver and the University of Dundee. We thank seminar participants, two anonymous referees, Ariel Bergmann, and Shu Lin for helpful suggestions. All errors remain our own.


Abstract

This article employs hazard models to investigate the role of exchange rate regimes in the timing of current account adjustment in developing countries. We identify high current account deficit spells and find that fixed exchange rate regimes increase the duration of high deficit spells and thus delay current account adjustment. The result is robust to a variety of model specifications and alternative classifications of exchange rate regimes. When distinguishing between hard pegs and soft pegs, we notice that the delay in the current account adjustment is primarily driven by hard pegs rather than soft pegs. (JEL F3, F4)

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