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A New Financial Market Structure for East Asia

A New Financial Market Structure for East Asia

Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang

This book contends that the East Asian financial constitution lacks an appropriate infrastructure, resulting in inefficient allocation of high savings and an over-inflated short-term debt market. It goes on to point out that despite high savings, East Asia’s dependency on financial centers outside the region is also relatively high, and that there is no strong region-wide network to connect various financial centers in East Asia.

Chapter 6: International Capital Flows and Business Cycles in the Asia Pacific Region

Soyoung Kim, Sunghyun H. Kim and Yunjong Wang

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation


6. International capital flows and business cycles in the Asia Pacific region Soyoung Kim, Sunghyun H. Kim and Yunjong Wang 1. INTRODUCTION Over the past decade, a number of Asia Pacific countries have liberalized their financial markets to foreign capital by reducing restrictions in inward and outward capital flows. At the same time, these countries have achieved a substantial degree of trade integration through trade liberalization policies. Increased capital flows due to financial and trade integration can generate substantial effects on business cycles. Large capital inflows following financial market liberalization can generate an initial surge in investment and asset price bubbles followed by capital outflows and recession, the so-called boom–bust cycles. In worst cases, the boom–bust cycles can end with a sudden reversal of capital flows and financial crises.1 On the other hand, financial market opening can reduce the volatility of some macroeconomic variables such as consumption through risk-sharing as it allows domestic residents to engage in international financial asset transactions.2 What are the macroeconomic effects of capital flows, in particular on business cycle fluctuations? Do business cycles become less volatile and more synchronized across countries as the degree of financial or trade integration increases? Understanding business cycle implications of capital flows is important as it provides welfare implications of financial market and trade liberalization policies, as well as international monetary and trade arrangements. This chapter focuses on the effects of capital flows due to financial market liberalization on business cycles,...

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