The Optimal Current Account in the Presence of Capital Control and Excessiveness of Capital Inflows

Abstract

This paper investigates whether the current account and capital flows are excessive or not, prior to the financial crisis in East Asian five countries, using the intertemporal model. The optimal current account series are calculated on the basis of intertemporal approach both under perfect capital mobility and under capital controls, against which actual current account and capital flows are compared and judged. The empirical results show that actual current accounts move closely in line with the optimal current account under perfect capital mobility in Korea, Malaysia, the Philippines and Thailand. In the case of Indonesia, actual current accounts are similar to the restricted optimal current accounts in the presence of capital controls. The analytical results show that capital inflows in Malaysia, Thailand and Indonesia seem to be too much in the sense that they are much larger than optimal level of capital flows prior to financial crisis. But actual capital flows move in the same way both in level and in direction as the optimal capital flows in Korea.