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

July 1, 1998

Preview Citation

Format: Chicago

Luis Carranza, and Chorng-Huey Wong. Policy Responses to External Imbalances in Emerging Market Economies: Further Empirical Results, (USA: International Monetary Fund, 1998) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital account, Capital inflows, Current account, Current account deficits, Foreign exchange, Real exchange rates

Keywords: Balance, Capital account, Capital account imbalance, Capital account shock, Capital inflows, Causality test, Current account, Current account deficits, Current account equilibrium, Current account position, Current account response, Current account result, Deficit, Emerging market economies, Exchange rate policy, Exchange rate system, Exchange rate volatility, External imbalances, Flexible exchange rate regime, Increase in capital account surplus, Interest rate differential, Nominal exchange rate, Policy designs, Real exchange rates, Responses to shock, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/103
Stock No:

WPIEA1031998
ISBN:

9781451948189
ISSN:

1018-5941

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