Asian Emerging Market Economies Research Articles

FDI and Trade Openness in the Tourism Market in Asian Emerging Market Economies

FDI and trade openness are considered development tools in all sectors, and the tourism sector is no exception. We examine the impact of inward FDI and trade openness on tourism in selected Asian emerging markets using panel data from the Autoregressive Distributed Lag of the Pooled Mean Group model and examine the direction of the causality of inward foreign direct investment and trade openness on tourism using the Granger causality test for the period 1996-2019. In our research model, we employed the number of tourists’ arrivals as the dependent variable and inward foreign direct investment and trade openness as the main independent variables. The control variables are as follows: GDP growth rate, inflation, mobile telephone subscriptions, and the global financial crisis of 2008. According to the pooled mean group ARDL estimation results, inward FDI, trade openness, GDP growth rate, inflation, and mobile telephone subscription variables had long-run significance in explaining tourism, whereas the global financial crisis dummy variable did not explain tourism arrivals. In the short run, an increase in the GDP growth coefficient attracted more international tourists to Asian EMEs, whereas an increase in inflation reduced tourism arrivals. The study found that there is a unidirectional relationship between FDI inflows and tourism arrivals, with the causality flowing from tourism to FDI. Furthermore, the results of the causality test implied that there were bidirectional connections between tourism and trade openness in Asian emerging markets. The study suggests that emerging economies should also promote short-term policies to increase international tourism by increasing trade openness and foreign direct investment.

No Great Convergence, but not Myth: Stabilization and Growth in East Asia, 1990-2018

Along with global economic integration through trade and financial flows, emerging market economies (EMEs) have become increasingly affected by global fluctuations and structural changes. Also, despite their apparent income convergence since the 2000s, their growth performances have become differentiated across regions. This paper overviews how EMEs in East Asia have coped with these circumstances since the 1990s, and assesses their economic performances from the aspects of both short-run macroeconomic stabilization and long-run economic growth in comparison with other regions. Scrutinizing monetary regime choices in the policy trilemma, dynamic patterns of total capital flows as well as by types of capital, saving-investment gaps and growth finance, and sources of economic growth, the exceptional income convergence of East Asian EMEs imply the following lessons, being apparently heterodox to conventional views: Given volatile global capital flows in the imperfect capital market, in small open economies such as EMEs, 1) for macroeconomic stabilization, exchange rate stability supported by managed float and capital controls is a more reasonable choice than the conventional mix of free float and open capital account, and 2) for economic growth, domestic savings are more reliable and important source of growth finance than foreign capital inflows. In fact, it turns out that 3) capital accumulation has been more important source of long-run economic growth than TFP growth throughout both advanced and emerging market economies. It should be noted, however, that 4) excessive capital accumulation could lead to relatively lower welfare levels than what income levels can attain.

The Role of Global and Domestic Shocks for Inflation Dynamics: Evidence from Asia*

This article studies inflation dynamics and the output–inflation trade‐off in small open economies. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks explain large parts of inflation and output dynamics. A series of counterfactuals support these findings and suggest that the role of monetary policy is limited. We estimate reduced‐form Phillips curve regressions based on alternative decompositions of output into global and domestic components. For most countries, we find a positive and significant correlation between inflation and the fraction of GDP driven by domestic shocks only. While including the output component driven by oil prices seems to ‘flatten’ the Phillips curve, though the effect is not significant, the component driven by global demand shocks ‘steepens’ the inflation–output nexus.

The risk‐taking channel of currency appreciation: A structural VAR investigation of Asian emerging market economies

AbstractIn this study, we analyze the impact of currency appreciation on sovereign spread and economic activities in Asian emerging market economies (EMEs) using a structural vector autoregression model. The key issue under scrutiny is the presence of a risk‐taking financial channel and its strength against the conventional trade channel. The underlying structural shocks are identified by a mix of sign, size, and zero restrictions. Based on the various measures of country risk, we find empirical evidence that a currency appreciation is expansionary for Asian EMEs through the financial channel, compressing the sovereign spread and offsetting the trade channel. We provide the policy implications of these results.

Please Mind the Spread. Impact of Sovereign Default Risk on Bond Portfolio Flows of Emerging Asian Economies during COVID-19 Pandemic

This paper examines the impact of COVID-19 pandemic on bond portfolio flows in Asian emerging market economies. We show that the outbreak of COVID-19 pandemic magnified the impact of sovereign default risk on bond portfolio outflows, it also leaded to a higher volatility of bond portfolio flows in longer term. This finding suggests that proper sovereign credit risk management might be particularly important to prevent negative impact caused by unstable bond portfolio flows during the crises.

Systematic Managed Floating

A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don’t obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called “systematic managed floating,” as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.

Comments by Chalongphob Sussangkarn, on Capital Control and Monetary Policy in Asian Emerging Market Economies

Comments by Chalongphob Sussangkarn, on Capital Control and Monetary Policy in Asian Emerging Market Economies

Comments by Iikka Korhonen, on Capital Control and Monetary Policy in Asian Emerging Market Economies

Comments by Iikka Korhonen, on Capital Control and Monetary Policy in Asian Emerging Market Economies

Capital Control and Monetary Policy in Asian Emerging Market Economies

This paper explores two policy options in emerging market economies (EMEs) to cope with volatile capital flows due to external monetary policy shocks; capital control policy and choice of exchange rate regime. Both tools reinforce each other when a foreign exchange risk premium shock hits the economy. A contractionary U.S. monetary policy shock has significant real effects in EMEs. Conventional wisdom tells us that a free floating exchange rate with inflation targeting is better when a country faces foreign shocks. However, we show that a flexible exchange rate with less capital controls is not the best option in EMEs based on vector autoregression analysis. Moreover, we set up a small open economy new Keynesian model with real wage and price rigidities. It shows that the small economy with labor market frictions is more vulnerable to exogenous shocks such as a foreign exchange rate shock under a fixed exchange rate regime than under a flexible exchange regime. We show that maintaining price stability is not desirable when there are substantial frictions in the labor market and the intratemporal elasticity of substitution is high. Finally, the model shows that the welfare cost difference between a policy of maintaining purchasing power and a policy aimed at price stability reverses as the intratemporal elasticity of substitution between home and foreign goods increases.

Systematic Managed Floating

A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don’t obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called “systematic managed floating,” as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.

Borrowing from “Pui” to Pay “Pom”: Multiple Borrowing and Over-Indebtedness in Rural Thailand

Summary Rural financial markets have grown rapidly in Asian emerging market economies, thus contributing to economic development and the reduction of poverty. At the same time, however, the level of indebtedness of rural households has increased, making households more vulnerable to shocks. One of the reasons for rising household debt is the ease of borrowing simultaneously from a growing number of lending institutions. This paper addresses two major questions. First, does borrowing from multiple sources increase rural households’ risk of over-indebtedness? Second, do over-indebted rural households refinance their outstanding loans through multiple borrowing, running the risk of becoming trapped in a debt cycle? Employing a dynamic random effects bivariate probit model for a unique set of longitudinal household panel data from Northeast Thailand, this study examines the bidirectional relationship between over-indebtedness and multiple borrowing to determine to what extent rural households become trapped in debt cycles. On the one hand, the results indicate that households in Northeast Thailand take on multiple loans, which further increases their risk of becoming over-indebted. On the other hand, our model results do not confirm the widespread notion that over-indebted rural households use multiple loans to refinance unpayable debts.

Value chains in Europe and Asia: Which countries participate?

The paper starts by reviewing the evolution and current status of value chains, and by assessing alternative measures of their significance. The value chains centred on North America, the European Union and East Asia are contrasted. North American value chains tend to be limited to the three NAFTA members under negotiated rules. In the European Union and East Asia value-chain formation has been largely a bottom-up process with free entry supported by low trade costs. To identify which countries have joined value chains, we calculate two measures of value-chain participation by European and Asian emerging market economies. The measures highlight (1) the rapid growth of value-chain activity in the twenty-first century, (2) the greater value-chain participation by East Asian emerging market economies than by EU emerging market economies, and (3) the cross-country variation in participation, with value- chain participation dominated by a handful of countries in both continents. The final section draws conclusions about the nature of international value chains and the policy implications.

Effects of Quantitative Easing Monetary Policy Exit Strategy on East Asian Currencies

With the end of the Federal Reserve Board's quantitative easing monetary policy, it is expected that the federal funds rate will be raised from almost 0% in the near future. We investigate the effects of changes in monetary policy, especially the effects of raising interest rates in the United States on East Asian currencies. Specifically, we use data on interest rates as a monetary policy instrument to investigate how changes in the US interest rates affect interest rates, exchange rates, and capital flows in East Asian emerging market economies. The analytical results suggest that East Asian countries would face capital outflows that depreciate their home currencies, with upward pressure against their own interest rates when the Federal Reserve Board raises the interest rate.

Asian emerging-market currencies in the international debt market (1994–2014)

This paper investigates the increasing presence of Asian emerging-market currencies in the international debt market over the last two decades. I use the “original sin” index developed by Eichengreen et al. (The pain of original sin. 〈http://elsa.berkeley.edu/~;;eichengr/research/ospainaug21-03.pdf〉 (August, 2003) to measure the use of an economy's home currency in international debt relative to the total international debt of its residents. The relative reliance on home currency debt is seen to have increased markedly in a number of economies. Using a random effects Tobit model, I examine factors underlying recent changes for a sample of nine Asian emerging market economies. The results suggest the importance of economic size, strength of institutions, and financial market development.

Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia

This paper examines past evidence of prolonged periods of reserve accumulation in Asian emerging market economies and the direct and indirect implications for monetary stability through the potential impact of such episodes on financial stability. The empirical research focuses on identifying periods of prolonged interventions and correlations with key macro-financial aggregates. Related changes in central bank balance sheets are also examined, especially in periods when the interventions are linked to strong capital inflows. In particular, we consider whether changes in the central bank's balance sheet from prolonged intervention lead to spillovers to the balance sheet of the private sector. We explore the possible forms of the spillovers and the consequences on asset prices (e.g., housing prices, equity prices, the growth in domestic credit). Policy implications are drawn. Finally, we propose a new indicator of reserves adequacy and excessive foreign exchange reserves accumulation based on a factor model. Two broad conclusions emerge from the stylized facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity to accumulate reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly.

The Financial Sector and Growth in Emerging Asian Economies

This study suggests that Asian emerging-market economies now have financial sectors relatively unlikely to provoke new financial crises, either because of reforms after the late-1990s East Asian financial crisis or because of the dominance of state-owned banks not subject to bank runs. Financial intermediation is found to be surprisingly high and is consistent with higher rates of saving and investment and hence growth in the main economies of the region than in counterparts in Latin America. There are sharply diverging patterns nonetheless (e.g., high foreign ownership of banks in the Republic of Korea versus minimal presence in the People's Republic of China). Differing national structures are identified (bank dominated, portfolio oriented, diversified). Policy recommendations include establishing clear long-term plans to improve efficiency in state-owned banks or reduce their dominance; pursuing bank capitalization targets at least as ambitious as those of Basel III; ensuring adequate regulation of growing nonbank intermediaries; reversing a recent trend toward renewed international financial closure in some economies; and improving legal security of bank regulators in some countries.

Input substitution, export pricing, and exchange rate policy

This paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market economies. We argue that weak input substitution between local labor and import intermediates in traded good production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle. In the presence of these two trade features, the adjustment role of the exchange rate is inhibited, so even a flexible exchange rate cannot stabilize the real economy in face of external shocks. Instead, due to the high exchange rate pass-through, exchange rate changes will lead to instability in domestic inflation. As a result, a flexible exchange rate regime becomes less desirable. In a very limited parameter space, a fixed exchange rate can be superior to monetary policy rules with high exchange rate flexibility, such as non-traded good price targeting. In most cases, however, non-traded good price targeting still delivers higher welfare.

Input Substitution, Export Pricing, and Exchange Rate Policy

This paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market economies. We argue that weak input substitution between local labor and import intermediates in traded goods production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle. In the presence of these two trade features, the adjustment role of the exchange rate is inhibited, so even a flexible exchange rate cannot stabilize the real economy in face of external shocks. Instead, due to the high exchange rate pass-through, exchange rate changes will lead to instability in both inflation and production cost. As a result, a fixed exchange rate may dominate a monetary policy rule with high exchange rate flexibility in terms of welfare. In a sense, our finding provides a rationale for the fear of floating phenomenon in these economies. That is, fear of floating may be central banks' rational reaction when these economies are constrained by the trade features mentioned above.

The Crisis of US Monetary Hegemony and Global Economic Adjustment

Over the past decade the world economy has been characterized by escalating global current account imbalances between the United States and East Asian states. This paper argues that US structural power in the global monetary system allowed the consolidation of a finance-led growth regime in the US based on massive capital inflows, asset inflation and consumption growth while inducing East Asian emerging market economies to establish export-led growth regimes. The global credit crisis has clearly uncovered the boundaries of US monetary hegemony, imposing severe adjustment throughout the global political economy. I analyse the political economy of global economic adjustment and argue that the crisis of US monetary hegemony is based domestically on the crisis of the finance-led growth regime and globally on the shortage of global demand. On the basis of an analysis of the impact of the crisis on the models of capitalism of the US, the Eurozone, and China, this paper shows that global demand deficiency will persist in the short to medium term. Durante la última década, la economía mundial se ha caracterizado por el aumento de los desequilibrios de cuentas corrientes globales entre los Estados Unidos y los estados del Asia oriental. Este artículo sostiene que el poder estructural estadounidense en el sistema monetario global permitió la consolidación de un régimen de crecimiento impulsado por las finanzas en Estados Unidos, en base a las entradas masivas de capital, inflación de los activos y crecimiento de consumo, mientras inducían a las economías de mercado emergente de Asia oriental, a establecer regímenes de crecimiento impulsado por las exportaciones. La crisis de crédito global ha puesto claramente al descubierto los límites de la hegemonía monetaria estadounidense, imponiendo un ajuste severo a través de la economía política global. Analizo la economía política del ajuste económico global y sostengo que la crisis de la hegemonía monetaria estadounidense está basada – domésticamente – en la crisis del crecimiento del régimen impulsado por las finanzas y – globalmente – en la escasez de la demanda global. En base a un análisis del impacto de la crisis en los modelos del capitalismo de los Estados Unidos, la Eurozona y la China, este artículo muestra que la insuficiencia en la demanda global persistirá en el corto y mediano plazo. 过去的十年，世界经济的一个特征一直是不断升高的美国与东亚国家之间的全球经常账户不平衡。本文认为美国在全球货币体系中的结构性权力使得美国基于大规模资本流动、资产膨胀、消费增长的金融业领导的增长机制得到巩固，同时诱使东亚新兴市场经济建立出口领导的增长机制。全球信贷危机已经清楚地揭示了美国金融霸权的范围，这一霸权通过全球政治经济强加严酷的调整。笔者分析全球经济调整的政治经济学，并且认为美国货币霸权的危机在国内是因为金融业领导的增长机制的危机，而在全球（国际）则是因为全球需求的短缺。基于危机对美国、欧元区和中国的资本主义模式的冲击的分析，本文认为，全球需求不足将在近中期持续。 اتسم الاقتصاد العالمي على مدى العقد الماضي بتصاعد أشكال الاختلال في الحسابات المالية الجارية على المستوى العالمي بين الولايات المتحدة الأمريكية ودول شرق آسيا. وترى هذه الدراسة أن النفوذ الهيكلي للولايات المتحدة في النظام النقدي العالمي قد أتاح ترسيخ نظام نمو ترتكز على العنصر المالي في الولايات المتحدة، وهو يقوم على أساس من التدفق الكبير لرؤوس الأموال، وتضخم الأصول ونمو الاستهلاك، بينما يغري اقتصاديات السوق الناشئة في شرق آسيا بإقامة أنظمة نمو ترتكز على التصدير. وقد كشفت الأزمة المالية العالمية بوضوح حدود الهيمنة النقدية للولايات المتحدة، والتي تفرض تكيّفاً شديداً في مجمل الاقتصادر السياسي العالمي. وتحلل الدراسة الاقتصاد السياسي للتكيّف الاقتصادي العالمي، وترى أن أزمة الهيمنة النقدية للولايات المتحدة تستند، محلياً، على أزمة نظام النمو المرتكز على العنصر المالي، وتستند، عالمياً، على نقص الطلب على المستوى العالمي. وانطلاقاً من تحليل لأثر الأزمة على نماذج الرأسمالية في أوروبا ودول منطقة اليورو والصين، تبيِّن الدراسة أن العجز في الطلب على المستوى العالمي سوف يستمر في المدى القصير والمتوسط. 지난 십여 년에 걸쳐 세계경제는 미국과 동아시아 간에 확대되는 지구적 무역 불균형에 의해서 특징지어진다. 이 논문은 지구적 금융체계 내에서 동아시아 신흥 시장경제가 수출주도형 성장체제를 확립하게 하면서, 미국의 구조적 권력이 대규모 자본 유입, 자산 인플레와 소비 증가에 기초한 미국의 금융 주도 성장체제를 공고하게 했다는 것을 주장한다. 세계 금융위기는 분명히 전지구적 정치경제를 통해서 커다란 조정을 강요하면서 미국의 금융 헤게모니의 경제를 드러내게 했다. 나는 지구적 경제조정의 정치경제를 분석하여 미국의 금융 헤게모니가 국내적으로는 금융 주도 성장체제의 위기에 근거하고 있고, 지구적으로는 지구적 수요부족에 근거하고 있다고 주장한다. 위기가 미국, 유럽과 중국 자본주의 모델에 가한 충격 분석에 근거하여, 이 글은 지구적 수요 부족이 중단기적으로 지속될 것이라는 것을 보여준다. В прошлое десятилетие мировая экономика была охарактеризована эскалацией глобального дисбаланса текущего счета между государствами Восточной Азии и Соединенными Штатами. В данной статье утверждается, что американские власти, в структуре мировой валютной системы, позволили консолидацию финансово-экономического режима роста в США на основе массивного притока капитала, инфляции активов и роста потребления, вызывая в Восточной Азии, с формирующейся рыночной экономикой, создание экспортно-ориентированного режима роста. Глобальный кредитный кризис ясно показал границы американской валютной гегемонии, вводящей жесткое регулирование во всей глобальной политической экономике. Мы анализируем политическую экономию глобального экономического регулирования и утверждаю, что кризис американской валютной гегемонии базируется внутри страны, на кризисе, ведомом финансированием режима роста и, в глобальном масштабе, на дефиците глобального спроса. На основе анализа влияния кризиса на модели капитализма в США, Еврозоне и Китае, эта работа показывает, что глобальный дефицит спроса будет сохраняться в краткосрочной и среднесрочной перспективе.

Capital inflows and asset prices: Evidence from emerging Asia

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for – roughly – twice the portion of overall house price changes they explain in OECD countries. We also address cross-country differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.