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On the Relationship Between Exchange Rates and External Imbalances: Should we Learn from East and South-east Asia?

Author

Listed:
  • Juan Carlos Cuestas

    () (Department of Economics and Research, Eesti Pank
    Department of Economics, University of Sheffield)

  • Paulo Jose Regis

    () (International Business School Suzhou, Xi'an-Jiaotong Liverpool University)

Abstract

The role the real exchange rate plays in determining current account balances has gathered momentum as East and Southeast Asian countries have seen increasingly positive current account balances. This paper analyses the evolution of current accounts in the region. A cointegrating relationship between the real effective exchange rate and the ratio of the current account balance to the GDP is tested, based on both linear and nonlinear models. The half-life of current account imbalances is relatively short, implying high capital mobility. Results point to the existence of a long-run relationship, and in most cases the causality runs from the exchange rate to the current account.

Suggested Citation

  • Juan Carlos Cuestas & Paulo Jose Regis, 2016. "On the Relationship Between Exchange Rates and External Imbalances: Should we Learn from East and South-east Asia?," Annals of Economics and Finance, Society for AEF, vol. 17(2), pages 255-280, November.
  • Handle: RePEc:cuf:journl:y:2016:v:17:i:2:cuestas
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    References listed on IDEAS

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    More about this item

    Keywords

    Emerging markets; Current account; Half-life; East and Southeast Asia;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F15 - International Economics - - Trade - - - Economic Integration

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