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THE CAPITAL INFLOWS PROBLEM IN SELECTED ASIAN ECONOMIES IN THE 1990s REVISITED : THE ROLE OF MONETARY STERILIZATION

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  • Tony Cavoli

    (SCAPE)

  • Ramkishen S. Rajan

Abstract

This paper develops a simple model to examine the reasons behind the capital inflow surges into selected Asian economies in the 1990s prior to the financial crisis of 1997-98. The simple analytical model reveals that persistent uncovered interest differentials and consequent capital inflows may be a consequence of complete sterilization, perfect capital mobility, sluggish response of interest rates to domestic monetary disequilibrium, or some combination of all three. Using the model as an organizing framework, the paper undertakes a series of related simple empirical tests of the dynamic links between international capital flows and the extent to which they are sterilized and uncovered interest rate differentials (UIDs) in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990 :1 to 1997 :5.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22562.

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Date of creation: Jan 2005
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Handle: RePEc:eab:financ:22562

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org
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Keywords: capital flows; East Asia; interest rates; monetary sterilization;

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References

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  1. Ramikishen Rajan, 2002. "Exchange Rate Policy Options for Post-crisis Southeast Asia: Is There a Case for Currency Baskets?," The World Economy, Wiley Blackwell, vol. 25(1), pages 137-163, 01.
  2. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-23, July.
  3. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized portfolio capital inflows in emerging markets: sterilization, expectations and the incompleteness of interest rate convergence," Pacific Basin Working Paper Series 95-04, Federal Reserve Bank of San Francisco.
  4. International Monetary Fund, 1990. "Capital Mobility in Developing Countries - Some Empirical Tests," IMF Working Papers 90/117, International Monetary Fund.
  5. Graham Bird & Ramkishen S. Rajan, 2001. "Banks, Financial Liberalisation and Financial Crises in Emerging Markets," The World Economy, Wiley Blackwell, vol. 24(7), pages 889-910, 07.
  6. Reuven Glick & Michael Hutchison, 1994. "Foreign reserve and money dynamics with asset portfolio adjustment: international evidence," Pacific Basin Working Paper Series 94-09, Federal Reserve Bank of San Francisco.
  7. Bernhard Fischer & Helmut Reisen, 1992. "Towards Capital Account Convertibility," OECD Development Centre Policy Briefs 4, OECD Publishing.
  8. Camiel de Koning & Stefan Straetmans, 1997. "Variation in the Slope Coefficient of the Fama Regression for Testing Uncovered Interest Rate Parity: Evidence from Fixed and Time-varying Coefficient Approaches," Tinbergen Institute Discussion Papers 97-014/2, Tinbergen Institute.
  9. Reuven Glick & Michael Hutchison, 1993. "Monetary policy, intervention, and exchange rates in Japan," Pacific Basin Working Paper Series 93-07, Federal Reserve Bank of San Francisco.
  10. Michael P. Dooley & Donald J. Mathieson, 1992. "Exchange rate policy, international capital mobility and monetary policy instruments," Proceedings, Federal Reserve Bank of San Francisco, pages 68-95.
  11. Hutchison, Michael M, 2003. "Intervention and Exchange Rate Stabilization Policy in Developing Countries," International Finance, Wiley Blackwell, vol. 6(1), pages 109-27, Spring.
  12. Carmen Reinhart & Mohsin S. Khan, 1995. "Capital Flows in the APEC Region," IMF Occasional Papers 122, International Monetary Fund.
  13. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
  14. Willett, Thomas D. & Keil, Manfred W. & Ahn, Young Seok, 2002. "Capital mobility for developing countries may not be so high," Journal of Development Economics, Elsevier, vol. 68(2), pages 421-434, August.
  15. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
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Cited by:
  1. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, Monetary Policy, and Global Financial Integration," NBER Working Papers 13902, National Bureau of Economic Research, Inc.
  2. Reuven Glick & Michael Hutchison, 2008. "Navigating the trilemma: capital flows and monetary policy in China," Working Paper Series 2008-32, Federal Reserve Bank of San Francisco.
  3. Cavoli, Tony & Rajan, Ramkishen S., 2009. "Managing Risks in a Volatile Environment: The Capital Inflows Problem in Asia," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 62(3), pages 325-340.

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