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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)

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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Bibliographic Info

Article provided by Palgrave Macmillan 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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References

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  1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
  2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
  3. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  4. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  6. Reinhart, Carmen & Khan, Mohsin, 1995. "Capital Flows in the APEC Region," MPRA Paper 8200, University Library of Munich, Germany.
  7. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  8. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
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Cited by:
  1. Yan, Ho-don & Yang, Cheng-lang, 2008. "Foreign Capital Inflows and the Current Account Imbalance: Which Causality Direction?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 434-461.
  2. Chakraborty, Debashis & Mukherjee, Jaydeep & Sinha, Tanaya, 2010. "The Structural Relationship between Current and Capital Account Balance in India: A Time Series Analysis," MPRA Paper 22806, University Library of Munich, Germany.
  3. Yusuf Ekrem Akbas & Mehmet Senturk & Canan Sancar, 2013. "Testing for Causality between the Foreign Direct Investment, Current Account Deficit, GDP and Total Credit: Evidence from G7," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(6), pages 791-812, December.
  4. Ho-don Yan & Cheng-lang Yang, 2012. "Are there different linkages of foreign capital inflows and the current account between industrial countries and emerging markets?," Empirical Economics, Springer, vol. 43(1), pages 25-54, August.
  5. Yan, Ho-don, 2007. "Does capital mobility finance or cause a current account imbalance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(1), pages 1-25, March.
  6. 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.
  7. 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.
  8. Ahmad Zubaidi Baharumshah & Evan Lau, 2009. "Structural breaks and the twin deficits hypothesis: Evidence from East Asian countries," Economics Bulletin, AccessEcon, vol. 29(4), pages 2517-2524.

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