Equilibrium is good: Comments on Athukorala and Rajapatirana

Ross McLeod ()

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: This paper explores the 'problem' of the impact of capital inflow on the real exchange rate in countries in Asia and Latin America, as discussed by Athukorala and Rajapatirana. It points out some shortcomings in their characterisation of the data, some inconsistencies in the data as presented, an inconsistency in their discussion of government responses to the problem, and what appear to be errors in the interpretation of the empirical results. It suggests some alternative interpretations of those results before going on to recast the problem as one that is driven by precisely the kinds of government responses to capital flows that the authors appear to support. In particular, the tendency of policy makers to hold real exchange rates away from equilibrium in response to continuously changing circumstances is argued to encourage exchange rate speculation, and thus to contribute to the occurrence of balance of payments crises.

Keywords: real exchange rate; capital flows; foreign direct investment; Washington Consensus (search for similar items in EconPapers)
Pages: 21 pages
Date: 2003
New Economics Papers: this item is included in nep-hpe and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:pas:papers:2003-12

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