The intertemporal approach to the current account: Evidence from Indonesia and Malaysia

• Main Authors: Ismail, Hamizun, Baharumshah, Ahmad Zubaidi
• Format: Conference or Workshop Item
• Language: English
• Published: 2007
• Subjects: HB Economic Theory
• Online Access: http://repo.uum.edu.my/2415/1/Hamizun_Ismail.pdf; http://repo.uum.edu.my/2415/
• Institution: Universiti Utara Malaysia

The study presents the empirical analysis of the current account positions of two ASEAN countries (namely, Indonesia and Malaysia) during the past four decades. We address the issue of external solvency by measuring the deviation of actual from the optimal path of the current account balance using Sachs’s (1982) intertemporal model. Of these two countries, our results show that the model performed noticeable better for Malaysia. We found that the Malaysia’s actual path moves closely to the estimated consumption-smooth currents accounts, with small (insignificant) deviations between them. Unlike Malaysia, we found weaker support of the model for the case of Indonesia. Indonesia’s external imbalances reveal the following: (i) the deficits of the mid 1980s and 1990s prior to 1997 financial crisis appear to be unsustainable; (ii) the evidence appears to be broadly consistent with the intertemporal model and hence suggests that capital is mobile; (iii) the large surpluses observed during the post-1997 period significantly deviate from the optimal path, implying that savings have reached a level that is beyond what would be required to support full consumption smoothing;and (iv) there is excessive volatility in international capital movements for consumption-smoothing purpose.