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

Tony Cavoli () and Ramkishen S. Rajan ()
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Tony Cavoli: School of Economics, University of Adelaide

SCAPE Policy Research Working Paper Series from National University of Singapore, Department of Economics, SCAPE

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 simple analytical model reveals that persistent uncovered interest differentials and consequent capital inflows may be a consequence of complete 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 and the extent to which they are sterilized and uncovered interest rate differentials (UIDs) in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1 to 1997:5.

Keywords: Capital flows; East Asia; interest rates; monetary sterilization; reserves (search for similar items in EconPapers)
JEL-codes: F30 F32 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn and nep-mac
Date: 2005-12
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