TAILIEUCHUNG - ASEAN income gap and the optimal exchange rate

This paper investigates the optimal exchange rate regime in a group of ASEAN countries, which minimises 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 influence 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. | UNIVERSITY OF WOLLONGONG AUSTRALIA School of Accounting Economics and Finance Working Paper Series 2019 http aef ASEAN Income Gap and the Optimal Exchange Rate Regime Ngoc Nguyen School of Accounting Economics and Finance University of Wollongong NSW 2522 Australia E-mail nhn887@ Associate Professor Charles Harvie School of Accounting Economics and Finance University of Wollongong NSW 2522 Australia E-mail charvie@ Professor Sandy Suardi Corresponding author School of Accounting Economics and Finance University of Wollongong NSW 2522 Australia E-mail ssuardi@ July 2019 WP 19-04 ASEAN Income Gap and the Optimal Exchange Rate Regime Ngoc Nguyen School of Accounting Economics and Finance University of Wollongong NSW 2522 Australia E-mail nhn887@ Associate Professor Charles Harvie School of Accounting Economics and Finance University of Wollongong NSW 2522 Australia E-mail charvie@uow. Professor Sandy Suardi Corresponding author School of Accounting Economics and Finance University of Wollongong NSW 2522 Australia E-mail ssuardi@ Forthcoming in Applied Economics 1 ASEAN Income Gap and the Optimal Exchange Rate Regime Abstract This paper investigates the optimal exchange rate regime in a group of ASEAN countries which minimises 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 influence 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

• Ngân hàng - Tín dụng
• ASEAN income gap
• Optimal exchange rate
• Foreign demand shock
• Exchange rate regime
• Income gap
• Panel SVAR