ASEAN income gap and the optimal exchange Rate Regime

Authors

Ngoc Hong Nguyen, University of WollongongFollow
Charles Harvie, University of WollongongFollow
Sandy Suardi, University of WollongongFollow

RIS ID

137577

Publication Details

Nguyen, N., Harvie, C. & Suardi, S. (2019). ASEAN income gap and the optimal exchange Rate Regime. Applied Economics, Online First 1-17.

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.