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Monetary Policy Transmission in Emerging Asia
Given the heavy reliance on bank lending as the main source of financing in most Asian economies, banks could potentially play a pivotal role in monetary policy transmission. However, we find that Asia’s bank lending channel or, more broadly, credit channel of domestic monetary policy is not very strong at the aggregate level. Using bank-level data for nine Asian economies during 2000–2013, we show that heterogeneity of bank characteristics (e.g., ownership type, financial position), degree of foreign bank penetration of the domestic banking sector, and global financial conditions all have a bearing on the response of domestic credit to changes in domestic monetary policy, and may account for the apparently weak credit channel at aggregate level.
Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets
In recent years, portfolio flows to emerging markets have become increasingly large and volatile. Using weekly portfolio fund flows data, the paper finds that their short-run dynamics are driven mostly by global “push” factors. To what extent do these cross-border flows and global risk aversion drive asset volatility in emerging markets? We use a Dynamic Conditional Correlation (DCC) Multivariate GARCH framework to estimate the impact of portfolio flows and the VIX index on three asset prices, namely equity returns, bond yields and exchange rates, in 17 emerging economies. The analysis shows that global risk aversion has a significant impact on the volatility of asset prices, while the magnitude of that impact correlates with country characteristics, including financial openness, the exchange rate regime, as well as macroeconomic fundamentals such as inflation and the current account balance. In line with earlier literature, portfolio flows to emerging markets are also found to affect the level of asset prices, as was the case in particular during the global financial crisis.
IMF Research Bulletin, December 2014
The December 2015 IMF Research Bulletin features a sampling of key research from the IMF. The Research Summaries in this issue look at “The Impact of Deflation and Lowflation on Fiscal Aggregates (Nicolas End, Sampawende J.-A. Tapsoba, Gilbert Terrier, and Renaud Duplay); and “Oil Exporters at the Crossroads: It Is High Time to Diversify” (Reda Cherif and Fuad Hasanov). Mahvash Saeed Qureshi provides an overview of the fifth Lindau Meeting in Economics in “Meeting the Nobel Giants.” In the Q&A column on “Seven Questions on Financial Frictions and the Sources of the Business Cycle, Marzie Taheri Sanjani looks at the driving forces of the business cycle and macroeconomic models. The top-viewed articles in 2014 from the IMF Economic Review are highlighted, along with recent IMF Working Papers, Staff Discussion Notes, and IMF publications.
Regional Economic Outlook, April 2014, Asia and Pacific
The five Regional Economic Outlooks published biannually by the IMF cover Asia and Pacific, Europe, the Middle East and Central Asia, Sub-Saharan Africa, and the Western Hemisphere. In each volume, recent economic developments and prospects for the region are discussed as a whole, as well as for specific countries. The reports include key data for countries in the region. Each report focuses on policy developments that have affected economic performance in the region, and discusses key challenges faced by policymakers. The near-term outlook, key risks, and their related policy challenges are analyzed throughout the reports, and current issues are explored, such as when and how to withdraw public interventions in financial systems globally while maintaining a still-fragile economic recovery.These indispensable surveys are the product of comprehensive intradepartmental reviews of economic developments that draw primarily on information the IMF staff gathers through consultation with member countries.
Monetary Policy and Financial Stability
The issue of using monetary policy for financial stability purposes is hotly contested. The crisis was a reminder that price stability is not sufficient for financial stability, financial crises are costly, and policy should aim to decrease the likelihood of crises, not only rely on dealing with their repercussions once they occur. It is clear that well-targeted prudential policies (including micro and macroprudential regulation and supervision) should be pursued actively to attenuate the buildup of financial risks. The question is whether monetary policy should be altered to contain financial stability risks. Should it lend a hand by temporarily raising interest rates more than warranted by price and output stability objectives? Keeping rates persistently higher is also possible, but more costly.
Drivers of Financial Integration – Implications for Asia
Deeper intraregional financial integration is prominent on Asian policymakers’ agenda. This paper takes stock of Asia’s progress toward that objective, analyzing recent trends in cross-border portfolio investment and bank claims. Then, it investigates the drivers of financial integration by estimating a gravity model of bilateral financial asset holdings on a large sample of source and destination countries worldwide, focusing in particular on the role of regulation and institutions. The paper concludes that financial integration in Asia could be enhanced through policies that lower informational frictions, continue to buttress trade integration and capital market development, remove restrictions to foreign flows and bank penetration, and promote a common regulatory framework.
A New Look at the Determinants of Growth in Asian Countries
This study examines the drivers of growth in Asian countries, with focus on the role of investment, the exchange rate regime, financial risk, and capital account openness. We use a panel data set of a sample of Asian countries over the period 1980 to 2012. Our results indicate that private and public investments are strong drivers of growth, while more limited evidence is found that reduced financial risk and higher foreign direct investment support growth. The exchange rate regime does not appear to be a strongly significant determinant of growth, but some specifications suggest that more flexible regimes are beneficial in this respect. Financial crises have a stronger dampening effect on growth in countries with more open capital accounts.
Vanuatu
This 2015 Article IV Consultation highlights that Vanuatu’s Real GDP is expected to decline by 2 percent in 2015 because of the cyclone damage to Vanuatu’s main export sectors—tourism and agriculture—which will be only partially offset by reconstruction activities and infrastructure investment. Risks to the outlook are biased to the downside since reconstruction may be constrained by availability of funding and by implementation capacity. Public sector recovery needs are estimated at about 20 percent of GDP. In 2016, a recovery in tourism and agriculture combined with further ramping-up of infrastructure projects is expected to propel growth to 5 percent.
Effectiveness of Capital Controls in Selected Emerging Markets in the 2000's
This paper estimates the effectiveness of capital controls in response to inflow surges in Brazil, Colombia, Korea, and Thailand in the 2000s. Controls are generally associated with a decrease in inflows and a lengthening of maturities, but the relationship is not statistically significant in all cases, and the effects are temporary. Controls are more successful in providing room for monetary policy than dampening currency appreciation pressures. We argue that the macroeconomic impact of capital controls depends on the extensiveness of the policy, the level of capital market development, the support provided by other policies, and the persistence of capital flows.
