On the Future of Inflation Targeting in East Asia

This article analyzes the problems associated with inflation targeting (IT) regimes in a number of East Asian countries. It scrutinizes the policy conflicts that can arise when a central bank that has adopted a formal inflation target to guide the conduct of monetary policy simultaneously manages the exchange rate and pursues financial stability objectives. To this end, it empirically investigates the importance of exchange rate and terms of trade movements as determinants of inflation rates across East Asian economies and discusses the role of central banks in guarding financial stability and the ways this may conflict with an IT regime. The article argues that IT never really has been a suitable monetary framework for East Asian countries and that it should hence be supplanted by transparent monetary frameworks that explicitly recognize the multiple goals that are being pursued by East Asian central banks.     

International Financial Contagion: Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transition economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulation and supervision are only slowly improving, and that stabilizing policies have slowly been eliminated. What insulated the CEECs from the recent wave of financial instability? To consider the counterfactual, we first provide a framework that links banking crises to financial deregulation. We then focus on a number of macro- and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's World Debt Tables, and from the BIS's Consolidated International Banking Statistics. We first compare past experiences in CEECs with those in other emerging economies as a cross-sectional reference point. We then consider whether the situation in CEECs has changed since the last banking sector problems, in order to establish a reference point across time. Our results indicate that the factors leading up to past banking crises are generally different in CEECs from those in other emerging economies. However, in recent years, the characteristics of CEECs have become more similar to those of other emerging economies.     

US Credit Crisis and Spillovers to Asia

We review key highlights of the global credit crisis. We then consider how financial turmoil in the largest advanced economies might be transmitted to East Asia. The focus is on foreign trade links, international capital flows, currency market pressures and mismatches, financial sector fragilities, and countercyclical monetary and fiscal policy actions. We introduce a set of vulnerability indicators and explore whether an ordinal ranking of East Asian economies according to these vulnerability indicators seems to be related to the cross-country differences in estimated slowdowns of economic growth during the crisis. Finally, we discuss how Asian economies might encourage the adoption of a stronger regulatory and supervisory framework in the USA and whether some Asian economies and the USA might pursue a more “balanced” growth strategy after the crisis.     

The financial cycles in four East Asian economies

This paper characterizes proxy measures of financial cycles using available data on four East Asian economies, viz., Hong Kong, Malaysia, the Philippines and Thailand. Spectral analysis is adopted to characterize the financial cycles and these cycles are compared with the business cycles of the four East Asian economies. The empirical findings indicated that with the exception of the equity price growth in Hong Kong, the period of the proxy measures for financial cycles is slightly longer than the period of the business cycle. More to the point, there is no evidence to show that the period of the proxy measures for financial cycles in these economies are operating at low frequencies similar to the period of the cycles of between 8 to 32 years observed for advanced economies such as the US, UK and Germany. Taking one step further, the paper finds that the financial cycles of these four economies are better captured by a band-pass filter estimated using the periods obtained in the paper as opposed to using long period cycles of between 8 to 32 years. These findings imply that one needs to be careful in making an a priori assumption on the frequency range the financial cycle is believed to operate.     

中国经济之强劲增长:对东亚的寓意

中国的崛起对东亚经济产生了深刻影响.不仅中国在东北亚的近邻通过贸易和投资从中国的开放政策中获益,而且那些曾经与中国争夺国外直接投资(FDI)和出口市场的东盟国家也开始从中国的经济增长中得到好处.中国作为世界经济增长的发动机之一已经对其东亚邻国产生了积极影响.通过"东盟+3"方案,特别是始于2002年的"中国?东盟"自由贸易协定,中国为东亚地区经济一体化提供了新的动力,从而为东亚经济增长发挥着日益重要的地缘政治和地缘经济作用.     

Policy Shifts and Financial Instability in Emerging Markets

We explain periods of financial instability following drastic policy shifts within a Hayekian framework. Hayek emphasized that prices, established via the market process, help market participants to form coherent expectations about the future and coordinate plans with one another. In this paper, we elaborate on how policy shifts may undermine planning based on price signals and exacerbate uncertainty about the future, which can contribute to financial instability. Based on our postulated framework, we clarify how financial liberalization in the 1980s/1990s and the recent discretionary monetary policies in the advanced economies may have contributed to recurring episodes of financial instability in emerging markets. In particular, this paper provides an explanation for (1) why we observe financial instability mainly shortly following financial liberalization, and (2) why financial developments in the emerging markets are sensitive to unexpected monetary policy changes in the advanced countries in the current zero‐interest rate environment.     

A few observations on financial liberalization and financial instability

Recent studies have conjectured that there may be a link between financial liberalization (FL) and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are, in fact, becoming structurally more vulnerable to currency and banking crises. In this paper, I argue that emerging economies are becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies—excluding transition economies—from 1973 to the present, a univariate analysis indicates that the likelihood of currency crises may increase with stronger reactions to financial variables than to real or external trade variables. Similarly, for banking crises, interest rate, exchange rate, maturity, and default may increase, while simultaneously the support structure of the government seems to decline.     

Can a comparative capitalism approach explain fiscal policy activism?

This study investigates the implications of models of capitalism for the responsiveness of countries’ fiscal policies during business cycles using new data for member countries of the Organization for Economic Cooperation and Development and China. We expand the literature by adding the category of East Asian nonliberal capitalism to the established distinction of liberal market economies and nonliberal coordinated market economies. These three differ substantially not just in their fiscal policies, but also in monetary policies, degree of financial market orientation, exchange rate regime, and labor market organization. As in previous studies, we find that governments of liberal economies adopt more countercyclical fiscal policies. Departing from existing studies, however, among the nonliberal models of capitalism, (East Asian) state-led models have more countercyclical fiscal policies than (European) coordinated market economies, perhaps as countercyclical as liberal economies, both historically and during the 2007–9 crisis. This is due to less independent central banks, managed float of exchange rates, and limited financial market orientation and financial openness in East Asia, which allow for more active fiscal policy. Among political factors, left-of-center governments, fractionalized party systems, and election years are associated weakly with countercyclical fiscal policy, as expected. Labor market coordination and welfare generosity have unclear roles in regard to fiscal policy, a topic for future research.     

Alternate instruments to manage the capital flow conundrum: A study of selected Asian economies

Capital inflows to and outflows from emerging market economies (EME) have increased significantly since 2000. This rapid increase, accompanied by a sharp rise in volatility, has amplified the complexity of macroeconomic management in EME. While foreign capital provides additional financing for productive investment and offers avenues for risk diversification, unbridled flows exacerbate financial and macroeconomic instability. In this paper, we focus on the experience of six emerging Asian economies (EAE) in dealing with capital flows. Using quarterly data, we identify the waves of capital flows experienced by these EAE and the efficacy of the various policy measures taken. The policy choices include negotiating the trilemma (i.e. balancing the need for monetary policy autonomy, exchange rate flexibility and capital account openness), as per the demands of the macroeconomic situation. The paper also analyses the extent to which intervention in the foreign exchange market and imposition of short‐term capital flow management measures have aided countries to negotiate the trilemma. The efficacy of these responses have been varied across countries, implying that a judicious mix of these measures, along with improvement in financial and institutional development, is required to effectively counter the vagaries of capital flows.     

The Vulnerability of ASEAN+3 Countries to International Financial Crises

This article focuses on the reaction of the Association of Southeast Asian Nations (ASEAN) economies to international financial shocks. The crises in emerging markets at the end of the last century underlined the significant vulnerability of the emerging ASEAN economies to international financial fluctuations and a lack of sustainability in their exchange rate regime. A structural VAR model is used to analyze the efficiency of the measures adopted by these countries after this episode of crisis in order to protect their economies against speculative attacks. The results reveal that the impact of the recent subprime crisis on emerging ASEAN countries is less significant than that observed in industrialized ones.     

Exchange Rate Asymmetry and Flexible Exchange Rates under Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries

While many have underscored the role of a flexible exchange rate policy under an inflation targeting (IT) regime, very few studies have examined what actually happens to exchange rate policy once the emerging market announces that it will adopt inflation targeting. The central contention of this paper is that while the adoption of an inflation targeting (IT) policy may lead to more flexible exchange rate movements, for various reasons it is possible that the degree of flexibility will be significantly higher on one side of the market. In this study, we demonstrate that four Asian economies—namely, Indonesia, Korea, the Philippines and Thailand—whom were among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of asymmetrical exchange rate behavior, wherein appreciation pressures are restrained more substantially than depreciation pressures.     

Real and Financial Integration in East Asia

This paper examines the real and financial integration of East Asian economies, by comparing the degree of real vs financial and global vs regional integration, before vs after the Asian crisis. First, price and quantity measures such as the size of intra‐ and inter‐regional trade, cross‐border financial assets, stock return correlation, and interest rate differentials are investigated. Second, the structural panel vector autoregression (VAR) model is constructed to analyze macroeconomic consequences of real and financial integration such as cross‐country output and consumption relation. The results suggest that (i) the degree of real integration significantly increased after the crisis, both regionally and globally; (iii) quantity and price measures showed an increased financial integration after the crisis, but the consumption relation did not; (iv) the degree of regional financial integration is smaller than that of global financial integration, based on the consumption relation; and (v) financial integration lags real integration, especially for regional integration.     

The 1997 Asian Currency Crisis,Financial Linkages,and the Monetary Policy of Japan

The evidence is examined that excessively liberal monetary policy by the Bank of Japan, before and after the financial collapse of Japan in 1992, may have led other East Asian economies into “over‐borrowing” and speculative investments, prior to the currency crisis in 1997–98. The authors test for cointegration and Granger causality between Japanese money supply M1 and the domestic investment of eight East Asian economies and Australia. US and German money supplies are also used as a benchmark. There is strong evidence that there are long‐ and short‐run causal relationships between the Japanese money supply and the domestic investment of the Asian crisis‐inflicted economies prior to 1997.     

The role of exchange rate in inflation targeting: the case of Turkey

ABSTRACT

The role of the exchange rates in emerging market economies that have adopted inflation targeting (IT) is a critical and contentious issue in the relevant literature. This article investigates whether an exchange rate-augmented Taylor rule describes the Central Bank of Republic of Turkey’s (CBRT) monetary policy. Covering the period from 2002:1 to 2017:8 it also explores possible nonlinearities in the reaction function of the CBRT by employing a Threshold Vector Autoregressive (TVAR) model. The linear estimation of the model highlighted the importance of the exchange rate in monetary policy under IT. The results of the nonlinear model indicate that the stance of monetary policy was asymmetric with respect to exchange rate movements during the conventional IT period. However, the asymmetric monetary policy stance disappeared in the aftermath of the Global Financial Crisis. Increasing considerations of financial stability undermined the asymmetric policy stance of the CBRT in the post-crisis period.     

Financial and Capital Account Liberalization,Financial Development and Economic Development: A Review of Some Recent Contributions

Abstract

This article presents a review of some recent contributions on the relation between global finance and economic development in emerging economies. It first, stresses the growing consensus among economists on the financial instability that financial and capital account liberalization can possibly cause in emerging economies. It then outlines and compares two alternative strategies to tame such instability. The comparison is between the “good-institutions need-to-come-first” approach put forward by some mainstream economists, and the request for a deeper reform of the existing monetary system advocated by heterodox economists.     

Financial market spillovers in transition economies

This paper examines financial market comovements across European transition economies and compares their experience to that of other regions. Correlations in monthly indices of exchange market pressures can partly be explained by direct trade linkages, but not by measures of other fundamentals. Higher-frequency data during three crisis periods reveals the presence of structural breaks in the relationship between exchange-, but not stock markets. While the reaction of markets during the Asian and Czech crises is muted, the pattern of high-frequency spillovers during the Russian crisis looks very similar to that observed in other regions during turbulent times. With greater financial market integration, the financial markets of the more advanced transition economies can be expected to behave more and more like their Asian and Latin American counterparts.     

Impact of energy infrastructure investments on renewable electricity generation in major Asian developing economies

The prime objective of this research is to empirically investigate the impact of energy infrastructure investments (public-private-partnership) on renewable electricity generation in major Asian developing economies (China, India, Indonesia, Malaysia, Pakistan, the Philippines, and Thailand). In doing so, we use the annual data of variables from 1993 to 2017. To achieve the study objective, the authors employ numerous panel econometric approaches such as the Grouped-Mean and Augmented Mean Group estimators. The overall conclusion of the findings is that investments in energy infrastructure play a significant role in promoting renewable electricity generation in Asian developing economies. The results also reveal that financial development, economic development, and openness further rise renewable electricity generation. Based on the findings, the authors attempted to provide novel implications for the promotion of energy infrastructure investments and sustainable development policies for the Asian developing economies. For instance, the authors suggest that governments and policy makers should realise the significance of greener energy and promote investments via public-private partnerships for renewable energy projects.     

Convergence of interest rates around the Pacific Rim

This article applies the panel data unit root tests provided by Im, Pesaran and Shin (Discussion paper, 1997) to examine the interest rate convergence of small-open Asian countries with major financial centres. With monthly data from 1988:1 to 1997:6, it was found that the nominal interest rates of these countries converge to the US rates rather than to Japan's. This finding is consistent with the view that the monetary authorities of non-Japan Asian economies pegged their exchange rates overwhelmingly to the dollar rather than the yen before the financial crisis of 1997.     

An Institutionalist Framework for a Consistent Financial Regulation

Abstract:

In the light of recurrent systemic crises that financialized market economies have been experiencing since the 1980s, this article seeks to determine the conditions required for a regulatory framework apt to ensure financial stability. Drawing upon an Institutionalist Minskyian endogenous financial instability approach, the article studies the fragilities of liberalized finance and points to some policy alternatives able to lead to an alternative financial regulatory model that is consistent with macroeconomic stability. It argues that in a weak regulatory environment financial markets naturally generate instabilities that could turn into systemic crises. The analysis maintains that in order to deal with such crises, a tight supervision should be framed under the aegis of public authorities and suggests some rules to develop a relevant regulatory system through an open and democratic decision process. Two points then deserve particular attention: a macro-prudential approach that regards instability as a systemic (non-individual) issue, and a preventive approach that aims at preventing systemic-risk generating activities from taking control over the markets.     

THE POST‐ASIAN CRISIS DROP IN INVESTMENT: THE CASES OF INDONESIA,KOREA, MALAYSIA,AND THAILAND

This study analyzes drops in East Asian investment and their determinants after the 1997–1998 Asian financial crisis. We first employ a random level‐shift autoregressive model to quantify the shift in investment ratios of four Asian economies hit by the 1997–1998 Asian financial crisis: Indonesia, Korea, Malaysia, and Thailand. We trace the major historical shifts in the levels of investment ratios and we find that the cumulated downward shifts in investment ratios during 1997–1998 for Indonesia, Korea, Malaysia, and Thailand are 6, 5, 14, and 14 percentage points, respectively. The investment ratios of most countries experienced several rebounds between 1999 and 2001, but the rebounds were too small to bring investment ratios back to their pre‐1990 levels. Having identified the episodes of investment shifts, the Bayesian Model Averaging (BMA) and several robust tests are employed to investigate the determinants of those level shifts in investment ratios. We find that real per capita gross domestic product growth and banking crises are the two most important factors contributing to shifts in the investment levels of these four crisis‐hit Asian economies. The results are useful in understanding the causes and remedies of global imbalances. (JEL C11, E22, F32, O53)