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Equilibrium is good: Comments on Athukorala and Rajapatirana

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  • Ross H McLeod

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Abstract

This paper explores the 'problem' of the impact of capital inflow on the real exchange rate in countries in Asia and Latin America, as discussed by Athukorala and Rajapatirana. It points out some shortcomings in their characterisation of the data, some inconsistencies in the data as presented, an inconsistency in their discussion of government responses to the problem, and what appear to be errors in the interpretation of the empirical results. It suggests some alternative interpretations of those results before going on to recast the problem as one that is driven by precisely the kinds of government responses to capital flows that the authors appear to support. In particular, the tendency of policy makers to hold real exchange rates away from equilibrium in response to continuously changing circumstances is argued to encourage exchange rate speculation, and thus to contribute to the occurrence of balance of payments crises.

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File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2003/wp-econ-2003-12.pdf
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Bibliographic Info

Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2003-12.

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Length: 21 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:pas:papers:2003-12

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Keywords: real exchange rate; capital flows; foreign direct investment; Washington Consensus;

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  1. Williamson, John, 1993. "Democracy and the "Washington consensus"," World Development, Elsevier, vol. 21(8), pages 1329-1336, August.
  2. Ross Mcleod, 2005. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(2), pages 133-157.
  3. Mudrajad Kuncoro & Tri Widodo & Ross McLeod, 2009. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 45(2), pages 151-176.
  4. Prema-Chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy, Wiley Blackwell, vol. 26(4), pages 613-637, 04.
  5. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
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