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Crises, Private Capital Flows and Financial Instability in Emerging Asia

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  • Ramkishen S. Rajan

    ()
    (Associate Professor at the School of Public Policy, George Mason University (GMU))

Abstract

Asia was faced with a sudden and sharp crisis in 2008-2009, the proximate cause of which was reversals in foreign capital flows, not unlike the regional crisis a decade ago. How different has this boom and bust cycle of international capital flows been from the previous one? The paper examines the balance of payments dynamics in emerging Asia to understand the magnitude and types of private capital flows to and from the region between 1990 and 2008. Attention is paid to both the crises periods of 1997-1998 as well as 2007-2008 along with the patterns of capital flows pre and post Asian crisis. While the region’s capital reversals in 1997-1998 were due to “other investments,” i.e. short-term bank lending, those in 2008-2009 were largely due to portfolio flows. It is not surprising that these two components are often referred to as “mobile capital” and are seen by many as a source of financial instability in comparison to foreign direct investment (FDI) which is viewed as a more stable form of external finance. However, such a conclusion needs to be tempered somewhat in view of the fact that a greater share of FDI inflows has been in the form of mergers and acquisitions (M&As) as opposed to Greenfield. The paper also discusses selected policy issues relating to liquidity and reserve adequacy, regional cooperation, exchange rate coordination and financial stability.

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Paper provided by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its series MPDD Working Paper Series with number WP/09/06.

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Handle: RePEc:unt:wpmpdd:wp/09/06

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  1. Rajan, Ramkishen, 2009. "Monetary, Investment, and Trade Issues in India," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195699951, October.
  2. Richard Portes & Helene Rey, 2000. "The determinants of cross-border equity flows," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20203, London School of Economics and Political Science, LSE Library.
  3. Jeffrey J. Frankel and Andrew K. Rose., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C96-062, University of California at Berkeley.
  4. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
  5. M. Shahidul Islam & Ramkishen S. Rajan, 2011. "Bank lending channel of monetary policy transmission: India and the global financial crisis," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 3(5), pages 557-575.
  6. Jeanne, Olivier, 2000. "Foreign currency debt and the global financial architecture," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 719-727, May.
  7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  8. Ramkishen S. Rajan, 2006. "Monetary and Financial Cooperation in Asia : Emerging Trends and Prospects," Finance Working Papers 22125, East Asian Bureau of Economic Research.
  9. Eckes Alfred E. & Bird Graham & Rajan Ramkishen S. & Canterbery E. Ray & Zaman M. Raquibuz & Taskin Fatma & Zaim Osman, 2000. "Global Economy Quarterly, Issue 2," Global Economy Journal, De Gruyter, De Gruyter, vol. 1(2), pages 1-109, December.
  10. Gopalan, Sasidaran & Rajan, Ramkishen. S, 2009. "Financial sector de-regulation in Emerging Asia: Focus on foreign bank entry," MPRA Paper 19592, University Library of Munich, Germany.
  11. Rabin Hattari & Ramkishen S. Rajan, 2009. "Cross-border Mergers and Acquisitions (M&As) in Developing Asia: The Role of Financial Variables," Working Papers, Hong Kong Institute for Monetary Research 362009, Hong Kong Institute for Monetary Research.
  12. Rabin Hattari & Ramkishen S. Rajan, 2008. "Trends and Drivers of Bilateral FDI Flows in Developing Asia," Working Papers, Hong Kong Institute for Monetary Research 112008, Hong Kong Institute for Monetary Research.
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Cited by:
  1. Petr Blizkovsky, 2012. "Two crises, two responses: adjustment of economic governance in ASEAN and the European Union," Asia Europe Journal, Springer, Springer, vol. 9(2), pages 91-106, March.
  2. Madiha Bashir & Attiya Yasmin Javid, 2014. "Financial Flows, External Capital Structure, Institutions and Economic Growth in Asian Developing Economies," PIDE-Working Papers, Pakistan Institute of Development Economics 2014:108, Pakistan Institute of Development Economics.

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