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Policy Responses to External Imbalances in Emerging Market Economies

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  • Luis Carranza
  • Chorng-Huey Wong

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/103.

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Length: 30
Date of creation: 01 Jul 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/103

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Cited by:
  1. 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.

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