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Tracking the Hidden Forces Behind Laos' 2022 Exchange Rate Crisis and Balance of Payments Instability

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  • Mariza Cooray
  • Rolando Gonzales Martinez

Abstract

This working paper uses a Dynamic Factor Model ('the model') to identify underlying factors contributing to the debt-induced economic crisis in the People's Democratic Republic of Laos ('Laos'). The analysis aims to use the latent macroeconomic insights to propose ways forward for forecasting. We focus on Laos's historic structural weaknesses to identify when a balance of payments crisis with either a persistent current account imbalance or rapid capital outflows would occur. By extracting latent economic factors from macroeconomic indicators, the model provides a starting point for analyzing the structural vulnerabilities leading to the value of the kip in USD terms dropping and contributing to inflation in the country. This findings of this working paper contribute to the broader literature on exchange rate instability and external sector vulnerabilities in emerging economies, offering insights on what constitutes as 'signals' as opposed to plain 'noise' from a macroeconomic forecasting standpoint.

Suggested Citation

  • Mariza Cooray & Rolando Gonzales Martinez, 2025. "Tracking the Hidden Forces Behind Laos' 2022 Exchange Rate Crisis and Balance of Payments Instability," Papers 2503.13308, arXiv.org.
    • Handle: RePEc:arx:papers:2503.13308
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    2. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(6), pages 1113-1141, December.
    3. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    4. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
    5. Bai, Jushan & Ng, Serena, 2008. "Forecasting economic time series using targeted predictors," Journal of Econometrics, Elsevier, vol. 146(2), pages 304-317, October.
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