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Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization

  • Tony Cavoli
  • Ramkishen S. Rajan

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 analytical model shows that persistent uncovered interest differentials and consequent capital inflows may be a result of complete monetary 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, the extent to which they are sterilized and uncovered interest rate differentials in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1-1997:5. Copyright 2006 East Asian Economic Association and Blackwell Publishing Ltd..

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Article provided by East Asian Economic Association in its journal Asian Economic Journal.

Volume (Year): 20 (2006)
Issue (Month): 4 (December)
Pages: 409-423

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Handle: RePEc:bla:asiaec:v:20:y:2006:i:4:p:409-423
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