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ASEAN income gap and the optimal exchange Rate Regime

Journal Article


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Abstract


  • This article investigates the optimal exchange rate regime in a group of ASEAN countries, which minimizes the adverse effects of foreign demand shocks on real output, the real exchange rate, price level and between country income gap. Using a panel structural vector autoregressive model for small open economies, we show that the extent by which foreign demand shocks influences the between-country income gap depends on the exchange rate regime and the transmission channels through output, the price level and the real exchange rate. Our results show that a fixed exchange rate is better in insulating output and real exchange rates against adverse foreign demand shocks. Nevertheless, a flexible exchange rate regime achieves lower inflation and narrows the income gap across countries. Further, foreign demand shocks explain a larger portion of the forecast error variance of macroeconomic variables under a fixed than under a flexible exchange rate regime.

Publication Date


  • 2020

Citation


  • Nguyen, N., Harvie, C. & Suardi, S. (2020). ASEAN income gap and the optimal exchange Rate Regime. Applied Economics, 52 (3), 288-304.

Scopus Eid


  • 2-s2.0-85076383638

Ro Full-text Url


  • https://ro.uow.edu.au/cgi/viewcontent.cgi?article=2625&context=buspapers

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1607

Has Global Citation Frequency


Number Of Pages


  • 16

Start Page


  • 288

End Page


  • 304

Volume


  • 52

Issue


  • 3

Place Of Publication


  • United Kingdom

Abstract


  • This article investigates the optimal exchange rate regime in a group of ASEAN countries, which minimizes the adverse effects of foreign demand shocks on real output, the real exchange rate, price level and between country income gap. Using a panel structural vector autoregressive model for small open economies, we show that the extent by which foreign demand shocks influences the between-country income gap depends on the exchange rate regime and the transmission channels through output, the price level and the real exchange rate. Our results show that a fixed exchange rate is better in insulating output and real exchange rates against adverse foreign demand shocks. Nevertheless, a flexible exchange rate regime achieves lower inflation and narrows the income gap across countries. Further, foreign demand shocks explain a larger portion of the forecast error variance of macroeconomic variables under a fixed than under a flexible exchange rate regime.

Publication Date


  • 2020

Citation


  • Nguyen, N., Harvie, C. & Suardi, S. (2020). ASEAN income gap and the optimal exchange Rate Regime. Applied Economics, 52 (3), 288-304.

Scopus Eid


  • 2-s2.0-85076383638

Ro Full-text Url


  • https://ro.uow.edu.au/cgi/viewcontent.cgi?article=2625&context=buspapers

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1607

Has Global Citation Frequency


Number Of Pages


  • 16

Start Page


  • 288

End Page


  • 304

Volume


  • 52

Issue


  • 3

Place Of Publication


  • United Kingdom