Current Account Imbalances in Sri Lanka and Taiwan: Long-run Adjustment Mechanisms and Policy Reaction

Abstract

Prompted by reports from such international organisations as the International Monetary Fund, the Western press has bombarded its readers with stories of the United States’ massive current account deficits and the equally enormous surpluses enjoyed by Germany and Japan. Even in the unemotional language of an international bureaucracy, the International Monetary Fund refers to these current account imbalances as ‘large’ (World Economic Outlook, 1986, p. 7; World Economic Outlook, 1987, p. 9; World Economic Outlook, 1988, p. 1; World Economic Outlook, 1989, p. 1; World Economic Outlook, 1990, p. 2). As a percentage of GDP, however, Table 10.1 shows that these imbalances are relatively modest compared with those experienced by some other countries over the period 1972–89.

Our thanks go to Tain-Jy Chen, Malcolm Dowling, Mansoob Murshed, Walter Newlyn, David Vines, John Williamson, Ya-Hwei Yang and seminar participants at the Asian Development Bank, the Chung-Hua Institution for Economic Research and the International Economics Study Group’s 1990 annual conference for comments on an earlier draft of this chapter. The generous hospitality and assistance provided by the Chung-Hua Institution during Fry’s visit to Taiwan in 1991 is also gratefully acknowledged. The robust unit root and cointegration tests were run on Burridge’s unit root program. Micro TSP, version 7.0, was used for all other cointegration tests, regressions, simulations, and graphics presented in this chapter.