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An Empirical Assessment Of Monetary Policy Responses To Capital Inflows In Asia Before The Financial Crisis

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  • Sung Yeung Kwack
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    Abstract

    This paper highlights monetary policy implemented by monetary authorities in response to a surge of capital inflows in Asia during the period 1985-1996. It statistically assesses the effectiveness of monetary policy responses. Regression results show that Asian countries as a group took the operation of a high rate of sterilization and the foreign exchange market intervention which yielded a small change in the exchange rate. Consequently, they succeeded in keeping nominal exchange rates at desired levels and in limiting increases in monetary growth, despite a surge in capital inflows. The adoption of floating exchange rates, it is concluded, could have avoided the occurrence of financial crisis in Asia. [F32, F41]

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Economic Journal.

    Volume (Year): 15 (2001)
    Issue (Month): 1 ()
    Pages: 95-113

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    Handle: RePEc:taf:intecj:v:15:y:2001:i:1:p:95-113

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    1. Rodriguez, Carlos Alfredo, 1981. "Managed Float: An Evaluation of Alternative Rules in the Presence of Speculative Capital Flows," American Economic Review, American Economic Association, vol. 71(1), pages 256-60, March.
    2. Maurice Obstfeld, 1982. "Exchange Rates, Inflation and the Sterilization Problem: Germany, 1975-1981," NBER Working Papers 0963, National Bureau of Economic Research, Inc.
    3. Montiel, Peter J, 1994. "Capital Mobility in Developing Countries: Some Measurement Issues and Empirical Estimates," World Bank Economic Review, World Bank Group, vol. 8(3), pages 311-50, September.
    4. Robert Brandon Kahn & Adam Bennett & María Vicenta Carkovic S. & Susan Schadler, 1993. "Recent Experiences with Surges in Capital Inflows," IMF Occasional Papers 108, International Monetary Fund.
    5. Kwack, Sung Yeung, 1998. "Factors contributing to the financial crisis in Korea," Journal of Asian Economics, Elsevier, vol. 9(4), pages 611-625.
    6. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
    7. Reinhart, Carmen & Reinhart, Vincent, 1998. "“Some Lessons for Policy Makers Who Deal with the Mixed Blessing of Capital Inflows,”," MPRA Paper 7123, University Library of Munich, Germany.
    8. Reinhart, Carmen & Khan, Mohsin, 1995. "Capital Flows in the APEC Region," MPRA Paper 8200, University Library of Munich, Germany.
    9. Obstfeld, Maurice, 1980. "Imperfect asset substitutability and monetary policy under fixed exchange rates," Journal of International Economics, Elsevier, vol. 10(2), pages 177-200, May.
    10. Weymark, Diana N, 1998. "A General Approach to Measuring Exchange Market Pressure," Oxford Economic Papers, Oxford University Press, vol. 50(1), pages 106-21, January.
    11. Robert J. Corker & Wanda Tseng, 1991. "Financial Liberalization, Money Demand, and Monetary Policy in Asian Countries," IMF Occasional Papers 84, International Monetary Fund.
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    Cited by:
    1. Kwack, Sung Y., 2005. "Exchange rate and monetary regime options for regional cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 57-75, February.
    2. Ouyang, Alice Y. & Rajan, Ramkishen S. & Willett, Thomas D., 2010. "China as a reserve sink: The evidence from offset and sterilization coefficients," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 951-972, September.

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