Catálogo de publicaciones - libros

After the 1997/1998 Asian financial crisis, many economies in the region set out to rebuild their savings, sometimes to excess. Capital inflows further boosted liquidity after interest rates in the US and Europe fell in early 2000. The resulting combination of large savings and lower borrowing costs spurred credit creation and economic growth, especially in emerging Asia. At the same time, appreciation pressures on exchange rates increased as did the overall risk to financial stability. Procyclicality risks are particularly high when capital flows reverse direction: Rapid liquidity growth can turn into a sharp contraction. So with plenty of liquidity and low borrowing costs, individuals, banks, and companies all shifted their preference toward more risky investments.

The external environment is an important backdrop in determining economic policy. Economies with open financial systems and convertible capital accounts are sensitive to global market conditions. Even economies with less open financial systems are affected. Those with liberalized trade and partially controlled financial systems are also influenced—through current account transactions and their financial repercussions.

This chapter considers the principles underlying the design and implementation of early warning indicators. We argue that indicators based on quantities—especially balance sheet aggregates—are most likely to yield indicators that issue warning signals well before vulnerabilities have grown too large for policy makers to control. As shown in Chap. , during the first phase of global liquidity, noncore liabilities of financial intermediaries were most likely to yield timely signals—as banks were center stage in intermediating credit growth. The second phase of global liquidity pivoted on the behavior of capital markets, so the behavior of fund managers should be reflected in the indicator. When credit growth is driven by corporate bond issuance by nonfinancial borrowers, aggregate issuance by corporates would be a useful indicator. In addition, if corporate borrowers engage in “carry trades” by borrowing in foreign currency (FCY) while holding the proceeds of corporate bond issuance in local currency financial instruments and deposits, then tracking the aggregate cash holdings of corporates would also yield useful information.

Excess savings and rising capital inflows—especially since the early 2000s—gave Asia ample liquidity with lower borrowing costs. This would spur domestic demand and growth, helping begin the process of rebalancing the region’s economic structure. As this happened, the behavior of economic agents—banks, firms, and households—also changed. The preference toward investing in financial assets increased. This added the risks of procyclicality discussed in previous chapters. Based on flow-of-fund analysis, we showed in Chap. 2 that the rise in bank assets in emerging Asia was driven by a surge in noncore liabilities associated with capital inflows. While this raised some concerns over its impact on financial stability, the precise extent and nature of the effect remains to be investigated. To what extent does the rise in noncore bank liabilities threaten Asia’s financial stability, and how does it influence the effectiveness of standard monetary policy?

The analysis so far has shown how global liquidity—boosted by easy money policy in advanced economies—has affected emerging markets, particularly in Asia. The focus has been on the implications on financial and macroeconomic stability and on the behavior of economic agents. It has also pointed to the limited effectiveness of standard monetary policy and the need for developing new early-warning indicators. From the development perspective, it is also of interest to find out how changing global liquidity and capital flows may affect socioeconomic issues such as income inequality, unemployment, and poverty. In this chapter, we show in particular how capital inflows to emerging Asia can also change these indicators.

When global financial conditions affect domestic conditions, the institutional details of how they are transmitted matter. Designing and implementing policies that address these spillovers need to carefully take these channels into account. As the prolonged period of ample global liquidity starts to fade or comes to a close, a lively debate has begun over the impact capital flows have on the macroeconomic and financial conditions of recipient economies. Standard policy measures may need to be reviewed given the formidable role “supply-push” factors played, the growing significance of capital markets in determining monetary aggregates, and the specific circumstances including sociodevelopment challenges in each economy.