Economic Adjustment in Small Open Economies to External Shocks Arising from the Carry Trade, Trade Liberalisation and Remittance Flows
Creators: name: Mohottala, Arjuna Wickramachchi
Publisher: name: The Australian National University
Year: 2016
Subjects: Carry Trade
SAARC
SAPTA
SAFTA
remittances
Australia
Threshold VAR

description: In recent years the vulnerability of both advanced and emerging small open economies to external shocks has attracted significant attention. Among these types of shocks, three shocks emanating from sudden movements of exchange rates, financial flows such as workers' remittances and trade liberalisation are identified to be of particular importance. This thesis is composed of three independent essays that investigate the macroeconomic impacts on small open economies from these three shocks spanning two geographic locations. First, Chapter 2, explores the macroeconomic effects of the unwinding of the carry trade using the example of the JPY/AUD carry trade and the Australia's macroeconomy. A nonlinear threshold VAR model was used to capture the asymmetric effects of normal sized and large shocks to capturing the unwinding of the carry trade. The results show that in a high pressure regime where it is likely for the carry trade to unwind, a fall in Australia's relative interest rate, combined with a reduction in commodity prices lead the economy to favourably respond to a fall in commodity prices, boosting Australia's production. This result confirms that the carry trade collapse and subsequent stimulus to exports was beneficial to Australia's growth when international financial markets were at their most stressed. Chapter 3 presents evidence on whether two regional trade agreements (RTAs) in South Asia, the South Asian Preferential Trading Arrangement (SAPTA) and the South Asian Free Trade Area (SAFTA) have bolstered intra-regional exports. The results suggest that the two RTAs have not had a significant impact on the region as a whole. SAPTA has not had any significant effect on intra-regional exports except for Bhutan which experienced a reduction in of export growth to the region. SAFTA has failed to have any significant impact on any of the partner countries. In contrast, the results show a different picture for country specific bilateral export growth. Almost all countries have had mixed fortunes in their bilateral export growth in adopting the two RTAs. Notwithstanding, post-2006, intra-regional exports have significantly benefitted from openness to trade and a reduction in overall tariff levels of South Asian partner countries. Chapter 4 investigates whether the steady inflow of workers' remittances to South Asia have resulted in an appreciation in the respective country's real effective exchange rate (REER), working through data since 1980. In addition, the research examines the factors contributing to the remittance flows into South Asia. The results show that income differentials have played a key role in the country-specific determinants of remittance flows. While mixed reactions to the real interest rate differentials were observed across the South Asian countries, an appreciation of the nominal exchange rates has continued to attract remittance flows to India, the Maldives and Pakistan.