Premium
Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization *
Author(s) -
Cavoli Tony,
Rajan Ramkishen S.
Publication year - 2006
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/j.1467-8381.2006.00240.x
Subject(s) - economics , disequilibrium , sterilization (economics) , monetary economics , capital outflow , interest rate , capital (architecture) , monetary policy , macroeconomics , exchange rate , international economics , capital formation , financial capital , market economy , central bank , medicine , history , archaeology , ophthalmology , human capital
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.