New paper

STRUCTURAL CURRENT ACCOUNT IMBALANCES: FIXED VERSUS FLEXIBLE EXCHANGE RATES?
Slavi T. Slavov

This paper returns to the age-old question of fixed versus flexible exchange rate. Using a panel of 128 countries over the period 1976-2005, I find that the structural current account alances of countries with fixed exchange rates are more highly correlated with fundamental drivers (such as net foreign assets, incomes, growth rates, fiscal policy, demographics, esource endowments) than the current accounts of floaters. Furthermore, this greater sensitivity to fundamentals leads to larger current account imbalances (both deficits and urpluses) for peggers. Pegging the exchange rate is statistically associated with a 1.1 percent increase in a country’s current account imbalance, relative to floating. These greater net flows f capital indicate that fixed exchange rates facilitate international capital mobility and financial integration. Finally, there is typically no difference between peggers and floaters in erms of current account persistence and, hence, the speed of adjustment of the current account.

http://www.economics.pomona.edu/slavov/regimes.pdf