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

Author/Editor:

Luis Carranza ; Chorng-Huey Wong

Publication Date:

July 1, 1998

Electronic Access:

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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.

Series:

Working Paper No. 1998/103

Subject:

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

English

Publication Date:

July 1, 1998

ISBN/ISSN:

9781451948189/1018-5941

Stock No:

WPIEA1031998

Pages:

30

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