Abstract
Global capital flows into emerging markets, including those in Asia, continue to be volatile. These capital flows generate both benefits and costs. The latter are associated with episodes of currency and banking crises like the 1997 Asian financial crisis and the 2008 global financial and economic crisis. Policy responses can be implemented to minimize the costs. At the same time, policy responses should vary depending on whether “pull” factors or “push” factors dominate the capital flows. Data show that the main impact of capital flows on economies of East Asia is reflected in real effective exchange rates, equity prices, and accumulation of foreign exchange reserves. If “pull” factors are dominant, policy makers should allow real exchange rates to appreciate in the long-term. Three broad categories of macroeconomic measures are available to countries facing surges of capital inflows, if they are not willing to allow the nominal exchange rate to appreciate: (i) sterilized intervention, (ii) greater exchange rate flexibility, and (iii) fiscal tightening (preferably through expenditure cuts). However, all of them have major drawbacks. Instead, capital controls or, more generally, macroprudential policy can be considered. Other policy recommendations include measures to encourage foreign direct investment, as this type of capital flow is more stable and beneficial; exchange rate coordination to reduce the adverse impacts of currency appreciation on the global competitiveness of domestic firms; and regional financial cooperation, particularly in the development of local bond markets. Recent data show the adverse impact of Quantitative Easing tapering on Asian economies. This is verified by econometric results showing the strong linkages between the United States bond markets and those in Asia. These findings enhance the role of macroprudential policy, which can be implemented in the context of regional cooperation in order to reduce negative spillovers across economies in Asia.
Highlights
Global capital flows remain an important issue in international finance
One immediate uncertainty is the evolution of monetary and fiscal policy in advanced economies and its impact on the global economy. Another uncertainty is that all major economies—the United States (US), the European Union (EU), the People’s Republic of China (PRC), Japan, and emerging economies collectively—are all undergoing major structural adjustments 5 years after the global financial crisis (GFC)
This paper looks into the experience of the ASEAN+3 economies with regard to capital flows during the period 1990 to the present
Summary
Economic performance of the Association of Southeast Asian Nations plus the People’s Republic of China (PRC), Japan, and the Republic of Korea (ASEAN+3) countries are highly sensitive to the global financial environment. One immediate uncertainty is the evolution of monetary and fiscal policy in advanced economies and its impact on the global economy Another uncertainty is that all major economies—the US, the European Union (EU), the PRC, Japan, and emerging economies collectively—are all undergoing major structural adjustments 5 years after the global financial crisis (GFC). (i) to get a better understanding of the dynamic nature of global liquidity—the factors driving global liquidity as well as the transmission channels to the ASEAN+3 markets; and (ii) to take stock of lessons learned with respect to impacts, policies, and implications of volatile capital flows on the ASEAN+3 economies. (iii) Based on lessons learned, the task is to design policy frameworks and guidelines to deal with future challenges in managing capital flows For this regional overview, we are interested in identifying the primary transmission channels of global liquidity into the ASEAN+3 economies. (iii) Have there been consistent transmission channels across different episodes of global liquidity expansion?
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