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Sterilization of capital inflows through the banking sector: evidence from Asia

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Author Info
Mark M. Spiegel

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Abstract

This paper develops an open-economy version of the Bernanke-Blinder model which indicates that sterilization efforts through increases in reserve requirements will have limited impact if viable financial alternatives to the commercial banking sector exist. I then examine the capital inflow surge experiences of seven developing Asian nations. Our analysis yields three stylized conclusions: First, the timing of capital inflow surges indicates a causal role for both domestic and foreign factors. Second, there is little general rule as to the most effective sterilization instrument. Finally, the experiences of the developing nations during their capital inflow surge period largely coincide with the predictions of the model. Korea, the country with the largest nonbank financial sector, had the least success in stemming the impact of capital inflow surges despite intervention through both open market operations and increased reserve requirements.

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Publisher Info
Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1995)
Issue (Month): ()
Pages: 17-34
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Handle: RePEc:fip:fedfer:y:1995:p:17-34:n:3

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Related research
Keywords: Capital movements ; Bank reserves ; Developing countries ; Asia ; Pacific Area;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lamberte, Mario B., 1994. "Managing Surges in Capital Inflows: The Philippines Case," Discussion Papers DP 1994-20, Philippine Institute for Development Studies. [Downloadable!]
    Other versions:
  2. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany. [Downloadable!]
  3. Jeffrey A. Frankel, 1994. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," IMF Working Papers 94/159, International Monetary Fund.
    Other versions:
  4. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April. [Downloadable!] (restricted)
  5. Reuven Glick & Ramon Moreno, 1994. "Capital flows and monetary policy in East Asia," Pacific Basin Working Paper Series 94-08, Federal Reserve Bank of San Francisco.
  6. Menzie Chinn & Michael Dooley, 1995. "National, regional and international capital markets: Measurement and implications for domestic financial fragility," International Finance 9508006, EconWPA. [Downloadable!]
  7. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September. [Downloadable!] (restricted)
  8. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Renu Kohli, 2001. "Capital Flows and Their Macroeconomic Effects in India," IMF Working Papers 01/192, International Monetary Fund. [Downloadable!]
  2. Angelos A. Antzoulatos, 1996. "Capital flows & current account deficits in the 1990s: why did Latin America & East Asian countries respond differently?," Research Paper 9610, Federal Reserve Bank of New York. [Downloadable!]
  3. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," The School of Economics Discussion Paper Series 0628, Economics, The University of Manchester. [Downloadable!]
  4. Robert Dekle & Kenneth M. Kletzer, 2001. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Working Papers 8322, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
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  6. Thomas D. Willett & Young Seok Ahn & Manfred W. Keil, . "Capital Mobility for Developing Countries May Not Be So High," Claremont Colleges Working Papers 2000-26, Claremont Colleges. [Downloadable!]
  7. Ramkishen S. Rajan & Reza Siregar & Iman Sugema, 2003. "Why was there a precrisis capital inflow boom in Southeast Asia?," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 265-283. [Downloadable!]
  8. Menzie Chinn & Michael Dooley, 1995. "Asia-Pacific Capital Markets: Measurement of Integration and the Implications for Economic Activity," NBER Working Papers 5280, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  10. Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073. [Downloadable!]
  11. Kenneth Kletzer & Mark Spiegel, 1999. "Sterilization costs and exchange rate targeting," Pacific Basin Working Paper Series 99-03, Federal Reserve Bank of San Francisco. [Downloadable!]
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  12. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 76, Economics, The Univeristy of Manchester. [Downloadable!]
  13. Mark M. Spiegel, 1995. "Raising reserve requirements in response to Asian capital inflow surges," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Dec 1. [Downloadable!]
  14. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," NBER Working Papers 5576, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Chinn, Menzie-D & Dooley, Michael-P, 1997. "Financial Repression and Capital Mobility: Why Capital Flows and Covered Interest Rate Differentials Fail to Measure Capital Market Integration," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 81-103, December. [Downloadable!]
    Other versions:
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