The purpose of this dissertation is to provide a better understanding of contemporaneous issues in international finance. The first chapter documents empirically the significant differences between persistent episodes of current account surplus and current account deficits in the last four decades. Motivated by a reversal of global imbalances in the last decades, results derived from this study show how persistent surplus episodes, associated to emerging markets in Asia and net exporters of natural resources, are driven by official capital flows, leave countries internationally more exposed and are less persistent than deficit episodes in developing economies. Positive imbalances seem to be prolonged by high investment or low domestic saving, slow output growth, improvements in the terms of trade and wide spreads between domestic and world interest rates. Opposite to the aftermath of persistent deficits, reversals from surplus episodes trigger massive inflows of private capital, significantly increasing output growth but surprisingly leaving the real effective exchange rate mainly unaltered.

In the second chapter we evaluate the impact of international reserves, terms of trade shocks and capital flows on the real exchange rate (REER). We observe that international reserves cushion the impact of TOT shocks on REER, and that this effect is important for developing but not for industrial countries.

Finally, the third chapter reviews the behavior of inflation in Malaysia during 1991-2006, paying particular attention to the subcomponents of the CPI responsible for the significant changes in inflation; we then propose two measures of Core Inflation. To conclude the analysis, we econometrically uncover the dynamics of inflation from two different perspectives. An error correction model shows that money growth, nominal effective exchange rate, unit labor costs growth, deviations from mark-up pricing, and excess money supply have significant effects on inflation. The second approach is based on the New Keynesian Phillips Curve (NKPC). Estimates of the NKPC reveal that inflation has sizeable backward looking component (inertia) but it also depends on expected inflation rate, the exchange rate, and a measure of demand pressure.