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

  • Menzie Chinn

    (University of California at Santa Cruz)

  • Michael Dooley

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
Date of revision:
Handle: RePEc:wpa:wuwpif:9508006
Note: Korearv.wp International Finance, KOREARV.AUX has wp 5.1 graphs.
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  1. 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.
  2. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
  3. Benjamin M. Friedman & Kenneth N. Kuttner, 1993. "Economic Activity and the Short-term Credit Markets: An Analysis of Prices and Quantities," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 193-284.
  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. Christina D. Romer & David H. Romer, 1993. "Credit Channel or Credit Actions? An Interpretation of the Postwar Transmission Mechanism," NBER Working Papers 4485, National Bureau of Economic Research, Inc.
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  7. 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.
  8. 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.
  9. Angeliki Kourelis & Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 94/39, International Monetary Fund.
  10. 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.
  11. 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.
  12. Prakash Loungani & Mark Rush, 1994. "The effect of changes in reserve requirements on investment and GNP," International Finance Discussion Papers 471, Board of Governors of the Federal Reserve System (U.S.).
  13. Menzie Chinn & William Maloney, 1998. "Financial and Capital Account Liberalization in the Pacific Basin: Korea and Taiwan During the 1980's," International Economic Journal, Taylor & Francis Journals, vol. 12(1), pages 53-74.
  14. Sean Becketti & Charles Morris, 1992. "Are bank loans still special?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 71-84.
  15. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  16. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  17. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  18. Bernhard Fischer & Helmut Reisen, 1992. "Towards Capital Account Convertibility," OECD Development Centre Policy Briefs 4, OECD Publishing.
  19. 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.
  20. Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 587-623, December.
  21. 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.).
  22. 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(1), pages 149-214.
  23. 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.
  24. 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.
  25. 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.
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