Equilibrium is good: Comments on Athukorala and Rajapatirana

This paper explores the ‘problem’ of the impact of capital inflow on the real
exchange rate in countries in Asia and Latin America, as discussed by Athukorala
and Rajapatirana. It points out some shortcomings in their characterisation of the
data, some inconsistencies in the data as presented, an inconsistency in their
discussion of government responses to the problem, and what appear to be errors in
the interpretation of the empirical results. It suggests some alternative
interpretations of those results before going on to recast the problem as one that is
driven by precisely the kinds of government responses to capital flows that the
authors appear to support. In particular, the tendency of policy makers to hold real
exchange rates away from equilibrium in response to continuously changing
circumstances is argued to encourage exchange rate speculation, and thus to
contribute to the occurrence of balance of payments crises.