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Exchange Rate Regimes, Capital Account Opening and Real Exchange Rates: Evidence from Thailand

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Author Info
Juthathip Jongwanich ()
Abstract

This paper examines the roles of pegged exchange rate regime and capital account opening inducing persistent RER appreciation in the lead-up to the 1997 currency crisis in Thailand. The three-sector (primary, manufacturing, and nontradable) economy-wide model is constructed and policy simulation experiments are undertaken. Key findings are imposing capital control under a pegged exchange rate regime would have averted the persistent internal RER appreciation and boom in nontradable sector. However, it would not have averted persistent external RER appreciation. Exports and output would have eventually declined because of the capital shortage. A freely floating regime only with a high developmental level of foreign exchange and financial markets would have been able to avert both persistent internal and external RERs appreciation. The export and output would have eventually increased. However, this regime would have generated fluctuations in domestic prices and output. The managed floating regime (combined with inflation targeting) would have helped reduce such adverse effects while retaining the benefit from exchange rate flexibility. In a context where the foreign exchange and financial markets are not well developed, capital control measures could be beneficial to ensure smooth functioning of a managed floating regime.

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Paper provided by Australian National University, Economics RSPAS in its series Departmental Working Papers with number 2006-01.

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Length: 42 pages
Date of creation: 2006
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Handle: RePEc:pas:papers:2006-01

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Keywords: Exchange rate regime Capital account and Real exchange rate

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Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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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