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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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Author Info
Tony Cavoli () (School of Economics, University of Adelaide)
Ramkishen S. Rajan () (School of Public Policy, George Mason University)

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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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Publisher Info
Paper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0518.

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Date of creation: Dec 2005
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Handle: RePEc:sca:scaewp:0518

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Related research
Keywords: Capital flows; East Asia; interest rates; monetary sterilization; reserves;

Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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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. 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.
  2. Ramikishen Rajan, 2002. "Exchange Rate Policy Options for Post-crisis Southeast Asia: Is There a Case for Currency Baskets?," The World Economy, Blackwell Publishing, vol. 25(1), pages 137-163, 01. [Downloadable!] (restricted)
  3. Hutchison, Michael M, 2003. "Intervention and Exchange Rate Stabilization Policy in Developing Countries," International Finance, Blackwell Publishing, vol. 6(1), pages 109-27, Spring. [Downloadable!] (restricted)
  4. Haque, Nadeem U. & Montiel, Peter, 1991. "Capital mobility in developing countries: Some empirical tests," World Development, Elsevier, vol. 19(10), pages 1391-1398, October. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Reuven Glick & Michael Hutchison, 1992. "Monetary policy, intervention, and exchange rates in Japan," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
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  7. 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. [Downloadable!] (restricted)
  8. Glick, Reuven & Hutchison, Michael M., 2000. "Foreign reserve and money dynamics with asset portfolio adjustment: international evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 229-247, December. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. Graham Bird & Ramkishen S. Rajan, 2001. "Banks, Financial Liberalisation and Financial Crises in Emerging Markets," The World Economy, Blackwell Publishing, vol. 24(7), pages 889-910, 07. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Guillermo A. Calvo, 1996. "Capital flows and macroeconomic management: tequila lessons," Working Papers in Applied Economic Theory 96-02, Federal Reserve Bank of San Francisco.
  13. Bernhard Fischer & Helmut Reisen, 1992. "Towards Capital Account Convertibility," OECD Development Centre Policy Briefs 4, OECD, Development Centre. [Downloadable!]
  14. 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. [Downloadable!]
  15. Frankel, Jeffrey A & Okongwu, Chudozie, 1996. "Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(1), pages 1-23, January. [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. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, monetary policy, and global financial integration," Working Paper Series 2008-15, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  2. Reuven Glick & Michael Hutchison, 2008. "Navigating the Trilemma: Capital Flows and Monetary Policy in China," Working Papers 252008, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
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