Author/Authors :
Halid, Noreha Universiti Kebangsaan Malaysia - Graduate School of Business, Malaysia , Ghazali, Noor Azlan Universiti Kebangsaan Malaysia - Graduate School of Business, Malaysia , Ibrahim, Izani Universiti Kebangsaan Malaysia - Gradauate School of Business, Malaysia , Ismail, Abdul Ghafar Universiti Kebangsaan Malaysia - Graduate School of Business, Malaysia , Jusoh, Mansor Universiti Kebangsaan Malaysia - Graduate School of Business, Malaysia
Abstract :
This study presents a general equilibrium model to explore the impact of international pricing practices on the behavior of current account. This study identifies the current account response towards monetary and uncovered interest parity (UIP) shocks under the environment of different pricing approaches. The model shows the pricing practices by exporters highly influence the impact of both monetary and UIP shocks on current account. However, the degree of current account response depends on the intra- and inter-temporal consumption substitution elasticities and interest rate elasticity of money demand. The strength of the UIP shock through exchange rate on current accounts is highly influenced by the interest rate elasticity of money demand. In contrast, the UIP direct shock on current account is not affected by both international pricing practices and consumer’s sensitivity towards consumption and interest rate. The study extends the existing current account research by proving the importance of UIP deviation, international pricing practices and consumer’s preferences in influencing the behavior of current account. It also suggests the policy makers to consider in those variables in formulating their current account policies.
