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Trilemma and Financial Stability Configurations in Asia

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  • Joshua Aizenman

    (Asian Development Bank Institute (ADBI))

Abstract

This paper takes stock of recent research dealing with the degree to which the trilemma choices of Asian countries facilitated a smoother adjustment during the global crisis of 2008– 2009, and the way the region has been coping with the adjustment to the postcrisis challenges. We point out that emerging Asia has converged to a middle ground of the trilemma configuration : limited financial integration, a degree of monetary independence, and controlled exchange rate buffered by sizable international reserves. This configuration, with the proper management of balance sheet exposure and public finances, facilitated a smoother adjustment of emerging Asia to the crisis, and was instrumental in inducing the rapid resumption of growth. The swings of financial flows, from large deleveraging of foreign positions in 2008 to the renewed inflows in 2010, validate the insight of the public finance approach to financial integration : the gains from deeper financial integration should be balanced against the costs of growing exposure to turbulences. A key lesson of the crisis is the need to apply a comprehensive cost/benefit approach to prudential policies, to the regulation of external borrowing and of domestic financial intermediation, and to the accumulation and use of international reserves. We illustrate these results in the context of the challenges facing emerging Asia’s adjustment during the global financial crisis, and the postcrisis policy stance dealing with the renewed inflows of capital.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Governance Working Papers with number 23219.

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Date of creation: Nov 2011
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Handle: RePEc:eab:govern:23219

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Keywords: Financial Stability; emerging Asia; financial integration; monetary independence; controlled exchange;

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  1. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  2. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers, National Bureau of Economic Research, Inc 11952, National Bureau of Economic Research, Inc.
  3. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper, University Library of Munich, Germany 16270, University Library of Munich, Germany.
  4. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt7g18546z, Center for International Economics, UC Santa Cruz.
  5. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers, National Bureau of Economic Research, Inc 14217, National Bureau of Economic Research, Inc.
  6. Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers, National Bureau of Economic Research, Inc 17228, National Bureau of Economic Research, Inc.
  7. Andrew Crockett & Chairman, 1999. "General discussion : exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 411-422.
  8. Yin-Wong Cheung & Xingwang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup’s Wardrobe and the Joneses," CESifo Working Paper Series, CESifo Group Munich 2065, CESifo Group Munich.
  9. Joshua Aizenman & Yi Sun, 2009. "The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'?," NBER Working Papers, National Bureau of Economic Research, Inc 15308, National Bureau of Economic Research, Inc.
  10. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, Monetary Policy, and Global Financial Integration," NBER Working Papers, National Bureau of Economic Research, Inc 13902, National Bureau of Economic Research, Inc.
  11. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 329-368.
  12. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Feb.
  13. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, Universidad del CEMA, vol. 0, pages 35-54, November.
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