Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang
Chapter 6: International Capital Flows and Business Cycles in the Asia Pacific Region
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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