The Search for a Framework
Edited by Masahiro Kawai and Mario B. Lamberte
Chapter 5: Managing Recent Hot Money Inflows in Asia
Robert N. McCauley1 INTRODUCTION 5.1 Capital inflows into Asia were more puzzling than problematic in the years leading up to the peak of the dollar in early 2002. Into 2002, private capital flows remained mixed, with equity inflows offset to some extent by private firms’ repayment of debts to international banks. These private outflows vis-à-vis banks were joined by official outflows in the form of a build-up of foreign exchange reserves. While the inflows took the form of a purchase of risky assets, the outflows amounted to a purchase of safe assets, especially the investment of official reserves in prime securities (McCauley, 2003). Rather than an international exchange of assets resulting in a symmetric sharing of risks, Asia was using the international capital markets to systematically lay off equity risk. Coming on top of generally substantial current account surpluses, Asian economies were battening down the hatches, positioning their international accounts to weather storms. The flows have shifted since 2002 and, at writing in early 2008, pose an increasing challenge to policymakers. The next section elaborates the differences in the patterns of capital flows. The following sections then take up portfolio equity flows, bond market flows, bank flows, and carry trades. The final section considers policy responses. 5.2 DIFFERENCES IN THE PATTERNS OF CAPITAL FLOWS SINCE 2002 Prospects for the strong performance of Asian economies have led to an acceleration of equity inflows. At the same time, prospects for appreciation, or at least stability, of Asian currencies have led to...
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