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How Capital Flows Affect Economy-Wide Vulnerability and Inequality: Flow-of-Funds Analysis of Selected Asian Economies

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In contrast to the situation that preceded the 1997–1998 Asian financial crisis, Asia today is a region with excess savings where corporate savings dominate. In the mid-2000s, the extent of liquidity was further amplified by massive capital flows, particularly bank-led flows. The flows were briefly interrupted by the global financial crisis, before debt-led flows began to dominate, following the Quantitative Easing (QE) policy in the United States. Using flow-of-funds data, this study determines that the surge in liquidity in Asian financial systems has changed the behavior of agents and institutions. The general trend shows that agent references for investing in financial instruments have increased as financial liberalization provides more opportunities to do so. This can have economy-wide repercussions, ranging from financial instability to widening income disparity and falling employment elasticity. In the banking sector, an increase in non-core sources of funding influences banks’ asset allocation, with loans increasing rapidly, escalating the risks of pro-cyclicality and asset bubble creation.

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  • Azis, Iwan J. & Yarcia, Damaris Lee, 2014. "How Capital Flows Affect Economy-Wide Vulnerability and Inequality: Flow-of-Funds Analysis of Selected Asian Economies," Working Papers on Regional Economic Integration 136, Asian Development Bank.
    • Handle: RePEc:ris:adbrei:0136
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    Cited by:

    1. Yin-Wong Cheung & Kenneth K. Chow & Matthew S. Yiu, 2017. "Effects of capital flow on the equity and housing markets in Hong Kong," Pacific Economic Review, Wiley Blackwell, vol. 22(3), pages 332-349, August.

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    More about this item

    Keywords

    Excess Savings; International Fund Flows; Financial Risks; Volatility;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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