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Policy Responses to External Imbalances in Emerging Market Economies: Further Empirical Results
Author:
Luis Carranza null

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Mr. Chorng-Huey Wong
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Series:
IMF Working Papers
Volume/Issue:
Volume 1998: Issue 103
Language:
English
Publication Date:
01 Jul 1998
DOI:
https://doi.org/10.5089/9781451948189.001
ISBN:
9781451948189
ISSN:
1018-5941
Pages:
30
Keywords:
WP; deficit; balance; nominal exchange rate; capital inflows; emerging market economies; external imbalances; exchange rate policy; policy designs; causality test; current account position; increase in capital account surplus; current account response; exchange rate volatility; capital account imbalance; capital account shock; interest rate differential; current account result; current account equilibrium; flexible exchange rate regime; exchange rate system; responses to shock; Capital account; Current account; Real exchange rates; Current account deficits
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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A bivariate vector-autoregression (VAR) model is used to test causal relations between the current account and the capital account in four emerging market economies. The results show that high capital mobility could be a major cause of current account instability. Therefore, macroeconomic policy to restore external balance must deal directly with capital inflows. The paper recommends making nominal exchange rate sufficiently flexible to avoid inconsistencies between short-run and long-run real exchange rates; complementing credit tightening by fiscal restraint to reduce interest rate differentials; and strengthening reforms and surveillance of the financial system to prevent banks from excessive risk taking.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund