Exchange Rate Misalignment And Current Account Sustainability: The Australian Experience

Abstract

Australia’s persistent current account deficit engenders lively debates about its intertemporal solvency. This paper aims at showing whether there is really a misalignment of the $A real effective exchange rate ($A REER) and, if it is the case, at wondering about its real influence on the current account of Australia. The estimation of our empirical model puts forward a misalignment of the $A REER, but at the same time allows to emphasise the reduction in the magnitude of the misalignment since the adoption of the flexible exchange rate regime. Adding the stabilisation of the current account deficit, although recurrent, results in lending support to the Australian current account sustainability commonly held view.