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

  • Tony Cavoli

    ()

    (School of Economics, University of Adelaide)

  • Ramkishen S. Rajan

    ()

    (School of Public Policy, George Mason University)

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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File URL: http://www.fas.nus.edu.sg/ecs/pub/wp-scape/0518.pdf
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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
Contact details of provider: Web page: http://www.fas.nus.edu.sg/ecs/scape/index.html

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  1. 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.
  2. Hutchison, Michael M, 2003. "Intervention and Exchange Rate Stabilization Policy in Developing Countries," International Finance, Wiley Blackwell, vol. 6(1), pages 109-27, Spring.
  3. Bernhard Fischer & Helmut Reisen, 1992. "Towards Capital Account Convertibility," OECD Development Centre Policy Briefs 4, OECD Publishing.
  4. Reuven Glick & Michael Hutchison, 1992. "Monetary policy, intervention, and exchange rates in Japan," Proceedings, Federal Reserve Bank of San Francisco, pages 225-257.
  5. 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.
  6. 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.
  7. 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.
  8. Graham Bird & Ramkishen S. Rajan, 2001. "Banks, Financial Liberalisation and Financial Crises in Emerging Markets," The World Economy, Wiley Blackwell, vol. 24(7), pages 889-910, 07.
  9. 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.
  10. Reuven Glick & Michael Hutchison, 1994. "Foreign reserve and money dynamics with asset portfolio adjustment: international evidence," Pacific Basin Working Paper Series 94-09, Federal Reserve Bank of San Francisco.
  11. 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.
  12. Haque, Nadeem U. & Montiel, Peter, 1991. "Capital mobility in developing countries: Some empirical tests," World Development, Elsevier, vol. 19(10), pages 1391-1398, October.
  13. Reinhart, Carmen & Khan, Mohsin, 1995. "Capital Flows in the APEC Region," MPRA Paper 8200, University Library of Munich, Germany.
  14. Ramikishen Rajan, 2002. "Exchange Rate Policy Options for Post-crisis Southeast Asia: Is There a Case for Currency Baskets?," The World Economy, Wiley Blackwell, vol. 25(1), pages 137-163, 01.
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