Policy Responses to External Imbalances in Emerging Market Economies: Further Empirical Results

Luis Carranza () and Chorng-Huey Wong

No 1998/103, IMF Working Papers from International Monetary Fund

Abstract: A bivariate vector-autoregression (VAR) model is used to test causal relations between the current account and the capital account in four emerging market economies. The results show that high capital mobility could be a major cause of current account instability. Therefore, macroeconomic policy to restore external balance must deal directly with capital inflows. The paper recommends making nominal exchange rate sufficiently flexible to avoid inconsistencies between short-run and long-run real exchange rates; complementing credit tightening by fiscal restraint to reduce interest rate differentials; and strengthening reforms and surveillance of the financial system to prevent banks from excessive risk taking.

Keywords: WP; deficit; balance; nominal exchange rate; capital inflows; emerging market economies; external imbalances; exchange rate policy; policy designs; causality test; current account position; increase in capital account surplus; current account response; exchange rate volatility; capital account imbalance; capital account shock; interest rate differential; current account result; current account equilibrium; flexible exchange rate regime; exchange rate system; responses to shock; Capital account; Current account; Real exchange rates; Current account deficits (search for similar items in EconPapers)
Pages: 30
Date: 1998-07-01
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=2678 (application/pdf)

Related works:
Journal Article: Policy Responses to External Imbalances in Emerging Market Economies: Further Empirical Results (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1998/103

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().