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Policy Responses to External Imbalances in Emerging Market Economies: Further Empirical Results

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Author Info
Chorng-Huey Wong (International Monetary Fund)
Luis Carranza (International Monetary Fund)

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Abstract

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. Copyright 1999, International Monetary Fund

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Article provided by Palgrave Macmillan Journals in its journal IMF Staff Papers.

Volume (Year): 46 (1999)
Issue (Month): 2 ()
Pages: 5
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Handle: RePEc:pal:imfstp:v:46:y:1999:i:2:p:5

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Ho-don Yan, 2005. "Causal Relationship Between the Current Account and Financial Account," International Advances in Economic Research, Springer, vol. 11(2), pages 149-162, May. [Downloadable!] (restricted)
  2. Tuck Cheong Tang & Dietrich Fausten, 2008. "Current And Capital Account Interdependence: An Empirical Test," Monash Economics Working Papers 04/08, Monash University, Department of Economics. [Downloadable!]
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