Current Account and Real Exchange Rate Dynamics in Indonesia

Current Account & Real Exchange Rate Dynamics in the Caribbean and Latin America Compared to the G7 Countries

“…Consequently, contribution of nominal shocks in explaining current account is abolished in the long run. On the other hand according to Affandi and Mochtar [6], in the short run where the price is not flexible, their results show that money supply increases will depreciate the currency and increases in nominal shocks will revamp the current account.…”

“…Several studies [1] [3]; Affandi and Mochtar [6] decompose the current account and the real exchange rate into temporary and permanent shocks and argue that a temporary shock creates the combination of a current account surplus (deficit) and real exchange rate depreciation (appreciation). According to Affandi and Mochtar [6], permanent factors are those that structurally affect current accounts in the long run such as supply side, productivity, as well as changes in preference.…”

“…According to Affandi and Mochtar [6], permanent factors are those that structurally affect current accounts in the long run such as supply side, productivity, as well as changes in preference. They define temporary factors on the other hand, as those that account affect current account only in the short run, such as nominal variables like price, money supply, and nominal exchange rate.…”

“…Empirical analyses of the impact of temporary and permanent shocks on the real effec- tive exchange rate and the current account testing the colloquial predictions of the intertemporal model of Obstfeld and Rogoff [2] have mainly been concentrated on the G7 and Asian countries, see Chinn and Lee [3] [4]; Lee and Chinn [1]; Shibamoto and Kitano [5]; Affandi and Mochtar [6] among others. Little empirical evidence has been gathered from the Caribbean and Latin American emerging market economies.…”

“…See for example, Lee and Chinn [1] and Affandi and Mochtar [6]. Of all the countries in the sample, Jamaica has the worst current account to GDP ratio averaging as low as −3% of GDP in the third quarter of 2008, Jamaica's current account to GDP balance has remained consistently negative; annual current account to GDP deficit was less than −13% in 2013.…”