Decomposing exchange rates of Asia into financial and real factors

Dongchul Cho and Kyuesook Han

Asia-Pacific Journal of Accounting & Economics, 2017, vol. 24, issue 3-4, 377-386

Abstract: This paper imagines a foreign exchange market in which a net financial flow curve and a current account curve interact to simultaneously determine equilibrium levels of exchange rate and current account. To identify the two curves, we selected four Asian countries (Indonesia, Korea, Philippines, and Thailand) that drastically liberalized financial accounts and exchange rate systems after the 1997 crisis, and assumed that the institutional changes altered the slopes of net financial outflow curves while maintaining those of current account. The results indicate that currency depreciation greatly contributes to stabilizing foreign exchange markets by suppressing financial outflows (or attracting inflows), although the effects are not uniform across the countries in the short-run.

Date: 2017
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DOI: 10.1080/16081625.2016.1166970

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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