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National, regional and international capital markets: Measurement and implications for domestic financial fragility

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Author Info
Menzie Chinn (University of California at Santa Cruz)
Michael Dooley

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Abstract

Interest rate based tests and savings-investment correlations disagree on the extent of capital mobility in Pacific Rim economies. The apparent success of several East Asian countries in sterilizing capital inflows has also fueled the controversy. This paper argues that previous studies examining money market rates may be misplacing their focus, since most lending is mediated through (sometimes regulated) banking systems. We forward a simple open-economy macro model, incorporating bank credit. Several predictions of the model are tested. Capital inflows are found to affect bank lending, in certain cases. Rapid expansion of bank lending in the previous two years is also associated with increases in the bank lending-interest rate spread, a proxy for risk. Finally, we assess whether bank lending is an important variable in determining changes in economic activity, specifically investment. The data suggest that the link between money and investment is weaker than the corresponding link involving bank credit.

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Paper provided by EconWPA in its series International Finance with number 9508006.

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Date of creation: 28 Aug 1995
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Handle: RePEc:wpa:wuwpif:9508006

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

References listed on IDEAS
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. Glick, Reuven & Hutchison, Michael, 1990. "Financial liberalization in the Pacific Basin: Implications for real interest rate linkages," Journal of the Japanese and International Economies, Elsevier, vol. 4(1), pages 36-48, March. [Downloadable!] (restricted)
  2. Jeffrey A. Frankel, 1994. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," IMF Working Papers 94/159, International Monetary Fund.
    Other versions:
  3. Fackler, James S. & Rogers, John H., 1993. "An empirical open-economy macro model with credit," Journal of Macroeconomics, Elsevier, vol. 15(2), pages 203-224. [Downloadable!] (restricted)
  4. Benjamin M. Friedman & Kenneth N. Kuttner, 1993. "Economic activity and the short-term credit markets: an analysis of prices and quantities," Working Paper Series, Macroeconomic Issues 93-17, Federal Reserve Bank of Chicago.
    Other versions:
  5. Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 94/39, International Monetary Fund.
  6. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-1), pages 149-214. [Downloadable!]
  7. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 511-26, May. [Downloadable!] (restricted)
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  8. Michael P. Dooley & Donald J. Mathieson, 1992. "Exchange rate policy, financial structure, and the transition from credit to monetary instruments," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  9. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May. [Downloadable!] (restricted)
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  10. Cara S. Lown, 1988. "The credit-output link vs. the money-output link: new evidence," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Nov, pages 1-10.
  11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  12. Sun Bae Kim, 1993. "Do capital controls affect the response of investment to saving? evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 23-39. [Downloadable!]
  13. Reuven Glick & Ramon Moreno, 1994. "Capital flows and monetary policy in East Asia," Pacific Basin Working Paper Series 94-08, Federal Reserve Bank of San Francisco.
  14. Christina D. Romer & David H. Romer, 1993. "Credit channel or credit actions? an interpretation of the postwar transmission mechanism," Proceedings, Federal Reserve Bank of Kansas City, pages 71-149.
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  15. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
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  16. Hamid Faruqee, 1991. "Dynamic Capital Mobility in Pacific Basin Developing Countries - Estimation and Policy Implications," IMF Working Papers 91/115, International Monetary Fund.
  17. Deborah J. Lindner, 1992. "Foreign exchange policy, monetary policy, and capital market liberalization in Korea," International Finance Discussion Papers 435, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  18. Reisen, Helmut & Yeches, Helene, 1993. "Time-varying estimates on the openness of the capital account in Korea and Taiwan," Journal of Development Economics, Elsevier, vol. 41(2), pages 285-305, August. [Downloadable!] (restricted)
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  19. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May. [Downloadable!] (restricted)
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  20. Bernhard Fischer & Helmut Reisen, 1992. "Towards Capital Account Convertibility," OECD Development Centre Policy Briefs 4, OECD, Development Centre. [Downloadable!]
  21. Browne, Francis X. & McNelis, Paul D., 1990. "Exchange controls and interest rate determination with traded and non-traded assets: the Irish-United Kingdom experience," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 41-59, March. [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. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Pacific Basin Working Paper Series 95-06, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
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