Would a flexible exchange rate really speed up current account adjustment?
I ask this question not just due to the fact that a country’s current account imbalance is the difference between its national savings and national investment, that the large US current account deficit is a reflection of its large saving deficit, and that the US bilateral deficit with China is only part of its overall deficit with the rest of the world. All these are true. Beyond these, many economists and policy wonks take it as self-evident that a flexible exchange-rate regime must deliver a faster current account adjustment. Many IMF statements also reflect this supposition. There is in fact no systematic evidence supporting it. I call this a faith-based initiative, something widely assumed to be true and actively peddled to countries as policy advice, but with little solid supportive evidence. In a systematic analysis of this issue, Menzie Chinn and I find absolutely no support in the data for the notion that countries on a de facto flexible exchange-rate regime exhibit faster conv
