Financial Crisis, Capital Outflows and Policy Responses: Simple Analytics and Examples from East Asia

Financial crises seem to have become the norm rather than the exception since 1992. In recognition of the frequency with which countries seem to be hit by financial crises, any typical undergraduate course in Money and Banking nowadays includes a section on financial crisis in emerging economies. While these texts offer useful and up-to-date discussions on concepts such as financial crises and sterilization of capital flows, there does not seem to be any attempt to link the discussion of these contemporary issues to the age-old analytics of the money market and money multiplier. This paper examines the impact of a crisis of confidence and resultant capital outflows from a small and open economy, and the possible policy options in response to such outflows using simple tools and definitions that will be familiar to any Money and Banking/Intermediate Macroeconomics student. To facilitate the discussion, examples are drawn from the East Asian crisis of 1997-98 (Indonesia, Korea, Malaysia and Thailand), though the analysis remains pertinent to emerging economies in general.Capital Flows, East Asia, Financial Crisis, Monetary Base, Money Supply, Money Multiplier

Management of Exchange Rate Regimes in Emerging Asia

This paper revisits the issue of exchange rate regimes in emerging Asia. It is divided into two main parts. The first part compares de jure and de facto exchange rate regimes in Asia over the decade 1999–2009. The second part focuses on the sustained stockpiling of reserves in developing and emerging Asian economies since 2000 (interrupted only briefly by the global financial crisis). The paper concludes with some observations on the management of Asian currencies in light of the global financial crisis and concerns about global imbalances.exchange rate regimes; exchange rate management; emerging asia; global financial crisis; global imbalances

RESTRAINTS ON CAPITAL FLOWS : WHAT ARE THEY?

Though there has been much general debate recently about the pros and cons of capital controls, there remains substantial confusion and uncertainty about what exactly is entailed by the term restraining global capital flows. Popular discussion around this has typically been long on rhetoric and loose generalisations and acutely short on specifics. The aim of this paper is therefore to help refine the debate somewhat by clarifying and systematically categorising the various concepts that have been discussed in policy circles and the popular media. Two specific country experiences with restraining capital flows, viz. Chile and Malaysia are highlighted and discussed, as are the recent and muchpublicised proposals for exchange controls (a la Paul Krugman) and a global currency transactions tax in the forms of a Tobin tax.Restraints, capital flows

The Japanese Economy and Economic Policy in Light of the East Asian Financial Crisis

The depth and breadth of the East Asian financial crisis has added a sense of acute urgency for some concrete and credible measures by policy-makers to revitalise the Japanese economy. While steps to be taken for the long-run competitiveness and economic revitalisation of the Japanese economy are clear (with the only doubt being about whether and how effectively they will be implemented), those needed to boost aggregate demand in the shortrun are far less obvious. Given the near-zero nominal interest rates in Japan, most observers argue that an expansionary monetary policy would be ineffective. However, as with Krugman (1998a,b), we argue that once a distinction is made between real and nominal interest rates, it is logically possible for monetary policy to be effective in raising demand if it is able to create inflationary expectations. This could probably be effected through explicit announcements by the Bank of Japan of the intention to target a certain inflation rate in the future.Japanese economy, economic policy, East Asia, financial crisis

Managing New-Style Currency Crises: The Swan Diagram Approach Revisited

The new-style currency crises that have inflicted a number of developing and emerging economies of late are characterized by sudden stops in capital inflows and adverse balance sheet effects. Given the potential high costs of these crises, there remains an ongoing debate on how they might best be managed when they do arise. This paper argues that the age-old Swan diagram, appropriately modified, is able to provide useful insights into how a country might manage a new-style crisis via a combination of adjustment (which involves expenditure switching and reducing polices) and financing.Adjustment, Expenditure Reducing, Expenditure Switching, Financing, Internal balance, External balance, Swan diagram

Have Exchange Rate Regimes in Asia Become More Flexible Post Crisis? Re-visiting the Evidence

There is a broad consensus that the soft US dollar pegs operated by a number of Asian countries prior to 1997 contributed to the regional financial crisis of 1997-98. There is, however, much less agreement on the types of exchange rate regimes operated by many Asian countries since the crisis. Can they still be characterized as soft US dollar pegs, or have they become genuinely more flexible? This paper revisits the evidence regarding the extent of exchange rate flexibility in the five Asian countries (Indonesia, Korea, Malaysia, the Philippines and Thailand) post crisis using alternative methodologies and data up to mid 2004. Using alternative methodologies is critical as different measures or parameters could lead to diametrically opposite conclusions regarding the type of exchange rate regime operated by a country.Asia, exchange rate regime, inflation targeting, interest rates, reserves, soft dollar peg

Impact of Exchange Rate Volatility on IndonesiaÂ’s Trade Performance in the 1990s

Whether a real devaluation ultimately proves to be expansionary or contractionary depends on whether the boost given to the exportables sector offsets any possible output-depressing effects that may accompany the expenditure-switching policy. Failure of the exportables sector to adequately respond to the price incentives is a virtual guarantee that devaluation will be contractionary. This appears to have been the experience of Indonesia, the country worst hit by the crisis of 1997-98. This paper explores whether the increased exchange rate variability of the Indonesian rupiah post 1997 may have been a cause for the countryÂ’s poor export performance.Devaluation, Exports, Imports, Trade, Indonesia, Volatility

Exchange Rate Arrangements for East Asia Post-Crisis: Examining the Case for Open Economy Inflation Targeting

The infeasibility of a monetary union for East Asia in the near future, as well as the limitations of other forms of super fixes, appears to leave a flexible regime as the only viable policy option. This paper first deliberates on the case for and against a flexible regime. To anticipate the main conclusion - while favoring relatively more flexible regimes, emerging economies in East Asia and elsewhere have continued to heavily manage their currencies despite being officially described as ?floaters?. The paper goes on to explore the case for and operational mechanics behind an open inflation targeting regime which has increasingly been advocated for small and open economies in East Asia and elsewhere. The importance of incorporating the exchange rate in open economy monetary policy rules is stressed. The post-crisis East Asian monetary policy arrangements provide a suitable context for analyzing what part the exchange rate might play in the construction of an inflation targeting regime and there is evidence suggesting that East Asian monetary authorities have been attempting to manage the variability of the currency movements.East Asia, Exchange Rate Regime, Fixed versus Float, Inflation Targeting, Monetary Policy Rules