| Economists have long studied movements in external balances and exchange rates of countries in order to formulate a meaningful relationship between them. Theoretical and empirical analysis, while agreeing on the presence of some association among the two, have yielded contradictory views on the exact relationship.;The result of the first analysis (the distributed-lag approach) confirms a long run tendency for the trade balance to improve following a devaluation of the currency; but the short run adjustment process across countries is dissimilar. Another finding (using the cross-correlation technique) indicates no evidence of a strong and systematic correlation between exchange rates and the trade balance components. The second macroeconomic study upholds the Harberger-Laursen-Metzler effect whereby a devaluation leads to a fall in savings. It has been established that an improvement in the current account, measured in terms of capital flows, can be achieved with a fall in the terms of trade. An important finding is that the rate of change in the exchange rate is significant in explaining the terms of trade determination.;This thesis examines the interaction between exchange rates and external balances of eight South-East Asian developing countries over the period 1960-88. In the first study, monthly data is used to estimate empirically the causal relationship between the real exchange rate and the trade balance and its components, using both a polynomial distributed-lag approach and a time-series cross-correlation coefficient approach. The second study, which employs a macro perspective, uses annual data to explore exchange rate-terms of trade-current account dynamics. Using pooled time-series data, three-stage least squares estimation of a simultaneous four equation model is undertaken, with the saving rate, investment rate, growth rate, and the terms of trade as endogenous variables. |
