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

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  • Juthathip Jongwanich

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    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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    File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2006/wp-econ-2006-01.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 2006-01.

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

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    Keywords: Exchange rate regime; Capital account; and Real exchange rate;

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    Cited by:
    1. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2011. "Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach," CESifo Working Paper Series 3645, CESifo Group Munich.

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