Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization

Authors: Cavoli, Tony¹; Rajan, Ramkishen S.²

Source: Asian Economic Journal, Volume 20, Number 4, December 2006 , pp. 409-423(15)

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Abstract:

This paper develops a simple model to examine the reasons behind the capital inflow surges into selected Asian economies in the 1990s prior to the financial crisis of 1997-98. The analytical model shows that persistent uncovered interest differentials and consequent capital inflows may be a result of complete monetary sterilization, perfect capital mobility, sluggish response of interest rates to domestic monetary disequilibrium, or some combination of all three. Using the model as an organizing framework, the paper undertakes a series of related simple empirical tests of the dynamic links between international capital flows, the extent to which they are sterilized and uncovered interest rate differentials in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1-1997:5.

Keywords: capital flows; East Asia; interest rates; monetary sterilization; reserves; F30; F32; F41

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-8381.2006.00240.x

Affiliations: 1: School of Economics and Finance, Queensland University of Technology, Brisbane, Qld 4001, Australia 2: School of Public Policy, George Mason University, 3401 North Fairfax Drive, Arlington, VA 22201, USA

Publication date: 2006-12-01