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Financial Integration and Real Exchange Rate Volatility: Evidence from South and South East Asia

Thouraya H. Amor, Amin U. Sarkar
2009 International Journal of Business and Management  
Real exchange rate fluctuations take a central place in the discussions over the choices of economic policies in developing economies. It is essentially the dependence with respect to imports and the specialization in exports that account for real exchange rate fluctuations on the economic performances of developing countries. The accessibility to the world financial market also plays an important role in helping to smooth out consumption in financing trade balance disequilibrium. Identifying
more » ... rium. Identifying the sources of real exchange rate fluctuations enables one to measure, on the one hand, the consequences of economic policies implemented by the government on the real exchange rates, and on the other, the room policy makers have at their disposal to deal with possible real exchange rate movements harmful to economic activity. In this perspective, we address in the paper the main question: does financial liberalization contribute to real exchange rate fluctuations in South and South East Asia? Our study suggests that openness helps to reduce real exchange rate fluctuations but financial integration increases real exchange rate volatility. We encourage the countries of South and South East Asia to improve the flexibility of their exchange system and to pursue the sequential liberalization policy.
doi:10.5539/ijbm.v3n1p112 fatcat:jyvxtyfefraobjf7q3bdnvmwhq