Capital Flows and Capital Account Management in Selected Asian Economies

Sen Gupta, Abhijit and Sengupta, Rajeswari (2014): Capital Flows and Capital Account Management in Selected Asian Economies. Published in: Global Financial Governance Confronts the Rising Powers (April 2016)

Abstract

Gross capital inflows and outflows to and from emerging market economies (EMEs) have witnessed a significant increase since early 2000s. This rapid increase in the volume of flows accompanied by sharp swings in volatility has amplified the complexity of macroeconomic management in EMEs. While capital inflows provide additional financing for productive investment and offer avenues for risk diversification, unbridled flows could also exacerbate financial instability. In this paper we focus on the evolution of capital flows in a few select emerging Asian economies, and analyze surge and stop episodes as well as changes in the composition of flows across these episodes. We also provide a comprehensive description of the capital account management policies adopted by the host countries and evaluate the efficacy of these measures by analyzing whether they achieved the desired goals.This kind of an analysis is highly relevant especially a time when EMEs around the world are about to face the repercussions of a potential Quantitative Easing (QE) tapering by the US or launch of fresh QE measures by the Euro-zone, either of which could once again heighten the volatility of cross-border capital flows thereby posing renewed macroeconomic challenges for major EMEs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital flows, Exchange market pressure, Impossible Trinity, Sterilized intervention, Capital controls, Global financial crisis.
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Abiad, Abdul, Detragiache, Enrica, and Tressel, Thierry (2010), “A New Database of Financial Reforms”, IMF Staff Papers, 57 (2), pp. 281–302.

Aizenman, Joshua, Chinn, Menzie D., and Ito, Hiro (2010), “The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration”, Journal of International Money and Finance, 29 (4), pp. 615–641.

Aizenman, Joshua, Lee, Jaewoo, and Sushko, Vladyslav (2012), “From the Great Moderation to the Global Crisis: Exchange Market Pressure in the 2000s”, Open Economies Review, Springer, 23 (4), pp. 597–621.

Ariyoshi, Akira, Habermeier, Karl, Laurens, Bernard, Otker-Robe, Inci, Canales-Kriljenko, Jorge Ivn, and Kirilenko, Andrei (2000), “Capital Controls: Country Experiences with Their Use and Liberalization”, Technical report, International Monetary Fund Occasional Paper.

Athukorala, Prema-Chandra, and Jongwanich, Juthathip (2012), “How Effective are Capital Controls? Evidence from Malaysia”, Asian Development Review, 29 (2), pp. 1–47.

Balakrishnan, Ravi, Nowak, Sylwia, Panth, Sanjaya, and Wu, Yiqun (2013), “Surging Capital Flows To Emerging Asia: Facts, Impacts And Responses”, Journal of International Commerce, Economics and Policy (JICEP), 4 (02).

Dornbusch, Rudi (2001), “Malaysia: Was it Different?”, NBER Working Papers 8325, National Bureau of Economic Research, Inc.

Forbes, Kristin J. (2014), “Capital Flow Volatility and Contagion- A Focus on Asia”, in Managing Capital Flows: Issues in Selected Emerging Market Economies, (editors) Bruno Carrasco, Subir Gokarn, and Hiranya Mukhopdhyay, Oxford University Press.

Forbes, Kristin J., and Warnock, Francis E. (2012), “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment”, Journal of International Economics, 88 (2), pp. 235–251.

Frankel, Jeffrey A. (2009), “New Estimation Of China’S Exchange Rate Regime”, Pacific Economic Review, 14 (3), pp. 346–360.

Frankel, Jeffrey A., and Wei, Shang-Jin (1994), “Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies”, in Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, NBER Chapters, National Bureau of Economic Research, Inc, pp. 295–333.

Ghosh, Atish R., Qureshi, Mahvash S., Kim, Jun Il, and Zalduendo, Juan (2014), “Surges”, Journal of International Economics, 92 (2), pp. 266– 285.

Girton, Lance, and Roper, Don (1977), “A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience”, American Economic Review, 67 (4), pp. 537–48.

Hansen, Lars Peter (1982), “Large Sample Properties of Generalized Method of Moments Estimators”, Econometrica, 50 (4), pp. 1029–1054.

Jayasuriya, Sisira, and Chen-Yu Leu, Shawn (2012), “Fine-Tuning an Open Capital Account in a Developing Country: The Indonesian Experience”, Asian Development Review, 29 (2), pp. 136–180.

Jongwanich, Juthathip, and Kohpaiboon, Archanun (2012), “Effectiveness of Capital Controls: Evidence from Thailand”, Asian Development Review, 29 (2), pp. 50–93.

Kim, Soyoung, and Yang, Doo Yong (2012), “Are Capital Controls Effective? The Case of the Republic of Korea”, Asian Development Review, 29 (2), pp. 96–133.

Magud, Nicolas E., Reinhart, Carmen M., and Rogoff, Kenneth S. (2011), “Capital Controls: Myth and Reality - A Portfolio Balance Approach”, NBER Working Papers 16805, National Bureau of Economic Research, Inc.

Magud, Nicols E., Reinhart, Carmen M., and Rogoff, Kenneth S. (2013), “Capital Controls: Myth and Reality”, Prepared for AEA Meeting 2014.

Ostry, Jonathan D., Ghosh, Atish R., Habermeier, Karl, Laeven, Luc, Chamon, Marcos, Qureshi, Mahvash S., and Kokenyne, Annamaria (2011), “Managing Capital Flows: What Tools to Use?”, IMF staff discussion note 11/06, International Monetary Fund.

Ostry, Jonathan David, Ghosh, Atish R., Habermeier, Karl Friedrich, Chamon, Marcos, Qureshi, Mahvash Saeed, and Reinhardt, Dennis B. S. (2010), “Capital Inflows: The Role of Controls”, IMF Staff Position Notes 2010/04, International Monetary Fund.

Patnaik, Ila, and Shah, Ajay (2012), “Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?”, IMF Economic Review, Palgrave Macmillan, 60 (3), pp. 439–464.

Pontines, Victor, and Rajan, Ramkishen S. (2011), “Foreign exchange market intervention and reserve accumulation in emerging Asia: Is there evidence of fear of appreciation?”, Economics Letters, Elsevier, 111 (3), pp. 252–255.

Prasad, Eswar S., and Rajan, Raghuram G. (2008), “A Pragmatic Approach to Capital Account Liberalization”, Journal of Economic Perspectives, 22 (3), pp. 149–72.

Prasad, Eswar S., Rajan, Raghuram G., and Subramanian, Arvind (2007), “Foreign Capital and Economic Growth”, Brookings Papers on Economic Activity, 38 (1), pp. 153–230.

Radelet, Steven, and Sachs, Jeffrey (2000), “The Onset of the East Asian Financial Crisis”, in Currency Crises, (editor) Paul Krugman, chapter 4, University of Chicago Press, pp. 105–153.

Reinhart, Carmen, and Edison, Hali (2001), “Stopping Hot Money”, Journal of Development Economics, 66 (2), pp. 533–553, URL

Reinhart, Carmen, and Reinhart, Vincent (1998), “Some Lessons for Policy Makers Who Deal with the Mixed Blessing of Capital Inflows”, in Capital Flows and Financial Crisis, (editor) M. Kahler, New York: Council of Foreign Relations.

Schadler, Susan (2010), “Managing Large Capital Inflows: Taking Stock of International Experiences”, in Managing Capital Flows: The Search for a Framework, (editors) Masahiro Kawai, and Mario B. Lamberte, Asian Development Bank Institute and Edward Elgar Publishing, pp. 105–128.

Sen Gupta, Abhijit, and Sengupta, Rajeswari (2014), “Negotiating the Trilemma and Reserve Management in an Era of Volatile Capital Flows in India”, in Managing Capital Flows: Issues in Selected Emerging Market Economies, (editors) Bruno Carrasco, Subir Gokarn, and Hiranya

Mukhopadhyay, Oxford University Press, pp. 1–34. Subramanian, Arvind, and Rajan, Raghuram (2005), “What Undermines Aid’s Impact on Growth?”, IMF Working Papers 05/126, International Monetary Fund.

Tamirisa, Natalia T. (2004), “Do Macroeconomic Effects of Capital Controls Vary by their Type? Evidence From Malaysia”, IMF Working Papers 04/3, International Monetary Fund.

Tobin, James (1978), “A Proposal for International Monetary Reform”, Eastern Economic Journal, 4, pp. 153–159.