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Sterilization of capital inflows through the banking sector: evidence from Asia

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  • Mark M. Spiegel

Abstract

This paper develops an open-economy version of the Bernanke-Blinder model which indicates that sterilization efforts through increases in reserve requirements will have limited impact if viable financial alternatives to the commercial banking sector exist. I then examine the capital inflow surge experiences of seven developing Asian nations. Our analysis yields three stylized conclusions: First, the timing of capital inflow surges indicates a causal role for both domestic and foreign factors. Second, there is little general rule as to the most effective sterilization instrument. Finally, the experiences of the developing nations during their capital inflow surge period largely coincide with the predictions of the model. Korea, the country with the largest nonbank financial sector, had the least success in stemming the impact of capital inflow surges despite intervention through both open market operations and increased reserve requirements.

Suggested Citation

  • Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
  • Handle: RePEc:fip:fedfer:y:1995:p:17-34:n:3
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    References listed on IDEAS

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    1. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
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    4. Jeffrey A. Frankel, 1997. "Sterilization of money inflows: Difficult (Calvo) or Easy (Reisen)?," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 263-285, December.
    5. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September.
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    9. Menzie Chinn & Michael Dooley, 1995. "National, regional and international capital markets: Measurement and implications for domestic financial fragility," International Finance 9508006, University Library of Munich, Germany.
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    Citations

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    Cited by:

    1. Renu Kohli, 2001. "Capital Flows and Their Macroeconomic Effects in India," IMF Working Papers 01/192, International Monetary Fund.
    2. Steven B. Kamin & Paul R. Wood, 1996. "Capital inflows, financial intermediation, and aggregate demand: empirical evidence from Mexico and other Pacific Basin countries," Proceedings, Federal Reserve Bank of San Francisco, pages 356-405.
    3. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
    4. Robert Dekle & Kenneth Kletzer, 2002. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 507-558 National Bureau of Economic Research, Inc.
    5. Thomas D. Willett & Young Seok Ahn & Manfred W. Keil, "undated". "Capital Mobility for Developing Countries May Not Be So High," Claremont Colleges Working Papers 2000-26, Claremont Colleges.
    6. Menzie Chinn & Michael Dooley, 1995. "Asia-Pacific Capital Markets: Measurement of Integration and the Implications for Economic Activity," NBER Working Papers 5280, National Bureau of Economic Research, Inc.
    7. Chinn, Menzie-D & Dooley, Michael-P, 1997. "Financial Repression and Capital Mobility: Why Capital Flows and Covered Interest Rate Differentials Fail to Measure Capital Market Integration," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 81-103, December.
    8. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    9. Joseph Bisignano, 1996. "Varieties of monetary operating procedures: balancing monetary objectives with market efficiency," BIS Working Papers 35, Bank for International Settlements.
    10. Kletzer, Kenneth & Spiegel, Mark M., 2004. "Sterilization costs and exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 897-915, October.
    11. Angelos A. Antzoulatos, 1996. "Capital flows & current account deficits in the 1990s: why did Latin America & East Asian countries respond differently?," Research Paper 9610, Federal Reserve Bank of New York.
    12. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 76, Economics, The Univeristy of Manchester.
    13. Ramkishen S. Rajan & Reza Siregar & Iman Sugema, 2003. "Why was there a precrisis capital inflow boom in Southeast Asia?," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 265-283.
    14. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst.
    15. Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073.
    16. Kohli, Renu, 2004. "The Transition from Official Aid: to Private Capital Flows Implications for a Developing Country," WIDER Working Paper Series 046, World Institute for Development Economic Research (UNU-WIDER).
    17. World Bank, 2008. "Turkey - Country Economic Memorandum : Volume 2. Sustaining High Growth, Selected Issues," World Bank Other Operational Studies 8017, The World Bank.
    18. Mark M. Spiegel, 1995. "Raising reserve requirements in response to Asian capital inflow surges," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec1.
    19. 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.

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