Search

This research investigates the relationship between real interest rate parity and the interest parity puzzle across several economies in the Asia‐Pacific region. Unlike previous studies, we establish a comprehensive theoretical framework for parity and utilize macroeconomic and financial market data from 15 economies in the region to examine it. Our findings indicate that most countries exhibit mild deviations from parity, with real interest rate differentials strongly correlated with changes in the real exchange rate and interest‐exchange rate interaction terms, particularly in middle‐income economies. While interest parity puzzle is also observed in high‐income economies, it is less prevalent in most middle‐income economies. Our analysis reveals that income levels are key drivers of deviations from parity in this model, with interaction terms also playing a crucial role in most cases. The implication here is that for carry trades, investors place significant importance on risk factors, especially in economies with relatively low risk. This insight helps to clarify a puzzle in this area. Therefore, it is imperative that investors should take into account the impact of interest‐exchange rate interaction terms when making carry trade decisions. Lastly, we underscore the significance of ex ante price forecast approaches in achieving parity. [ABSTRACT FROM AUTHOR]

Copyright of Revista Evidenciação Contábil & Finanças is the property of Revista Evidenciacao Contabil & Financas and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Purpose: This study empirically examines the effect of capital controls on the volume and composition of capital flows at aggregated as well as at disaggregated level by different asset classes such as debt, FDI, equity, and derivatives. Design/methodology/approach: Several dynamic panel SYS-GMM models are employed on two sets of unique data on cross-border capital flows and capital control index along with control variables at aggregated and disaggregated level by different asset classes during 1995–2015 for a sample of 31 Asian economies. Findings: Econometric findings suggest that higher capital controls effectively reduce gross capital flows. The reduction in gross capital flows is largely found to be on account of effectiveness of controls on equity flows. However, the impact of controls on overall debt and derivative flows is found to be insignificant. Further, it was found that an increase in direct capital controls disaggregated by inflow and outflow categories significantly reduced the inflow of debt and equity + FDI flows and outflow of equity + FDI and derivative flows. Finally, the study did not find any substitution effect (due to indirect controls) and net effect on capital flows. Practical implications: Results of such empirical examination may enable governments in respective countries to pursue prudent and rational capital controls as a shield against capital flight and shock transmission. Social implications: Preventing capital flight through effective controls has macroeconomic benefits such as maintaining stability in income, growth, interest rate, exchange rate, and employment levels for the society. Originality/value: The primary contribution of the study is the analysis of effectiveness of capital controls disaggregated by different asset categories such as debt, equity, FDI, and derivatives using two unique recent data sets for a large sample of Asian economies. [ABSTRACT FROM AUTHOR]

In this paper, we investigate the extent of monetary independence in a group of ten Asian countries: China, Malaysia, Japan, India, Indonesia, Philippines, Thailand, Korea, Singapore, and Hong Kong. While the traditional investigation has considered only the bivariate relationship between the home interest rate and the base rate, we employ both single-equation and vector autoregressive representations of the bivariate and the trivariate relationship including the desired (or optimal) interest rate. We find in most countries, that the ranking of monetary independence is relatively consistent across the models and methodologies although model specifications produce important differences for some countries such as Japan, Indonesia, and India. Trilemma suggests that a country cannot accomplish all three policy objectives: monetary independence, exchange rate stability, and free capital mobility. To increase monetary independence a country must choose between greater exchange rate flexibility or a lower degree of capital mobility. The fact that China and Malaysia, the two countries that are known to have imposed the strictest capital controls, consistently rank high in various scenarios while Hong Kong, which has maintained nearly the freest regime in capital markets, is lowest in monetary independence, indicates that perhaps capital controls may play a more important role than does exchange rate flexibility in securing independence in monetary policy making. On the other hand, countries that maintain greater exchange rate stability do not necessarily rank low, unless it is combined with greater capital mobility as in the case of Hong Kong. [ABSTRACT FROM AUTHOR]

There has recently been much discussion on the relevance of the open economy trilemma in the context of deepening financial integration of countries across the world (see for instance, Rey (2013) and Devereux and Yetman (2014)). The open economy trilemma is an important issue for the countries in Asia not least because their financial systems are small and exchange rate stability is crucial to their economic growth. This paper investigates whether the economies in Asia are still bound by the "impossible trinity" by examining the interest rate transmission from the US to the region before and after the onset of the global financial crisis. We make a distinction between long-run versus short-run transmission of interest rates by conducting the Peseran bounds test of cointegration and Wald test of joint significance respectively on autoregressive distributed lag models estimated with data from nine Asian economies. The findings on the strength of interest rate pass-through are related to each country's trilemma configuration. Overall, our empirical results provide some supporting evidence that the Asian economies are still constrained by the open economy trilemma. [ABSTRACT FROM AUTHOR]

This article investigates the channels through which the short-term interest rate is used as an instrument to stabilize the exchange rates in Asia during the financial crisis in the 1990s. A time-varying-parameter model with Generalized Autoregressive Conditional Heteroscedasticity (GARCH) disturbances is employed to estimate the dynamic effect of the interest rate on the exchange rate. We distinguish the direct effect from the indirect effect. The direct effect exists so that a contractionary monetary policy can have an appreciation impact (the traditional view). The indirect effect refers to the higher default risk induced by a monetary policy tightening, which on the contrary generates a depreciation pressure (the revisionist view). Using weekly data from Indonesia, South Korea and Thailand from 1997:07 to 1998:12, we find that there is no significant evidence in favour of the traditional view. The revisionist view is clearly in effect in Thailand at the very beginning of the crisis. [ABSTRACT FROM AUTHOR]

Monthly data are used to investigate reserves management in eight Asian and Latin American countries. Idiosyncratic explanatory variables enter into co-integration relationships based on a stochastic buffer stock model, where a reserve variability measure is obtained via conditional variance approaches. International factors influence the co-integration residuals (representing the excess demands for reserves), which tend to co-move within and across geographical areas. Principal components analysis is then implemented to associate their common drivers with the US fed fund effective interest rate and real-effective exchange rate. This two-step approach sheds light on some controversial aspects of reserves and exchange rate management, such as 'fear of floating' and mercantilist behavior. Our results suggest that the size of recent excess reserve holdings is probably overstated. [ABSTRACT FROM AUTHOR]

Following the 1997 financial crisis in East Asia, the issue of contagion has resurfaced. Contagion has most often been associated with high frequency events; hence, it has been measured on stock market returns, interest rates, the exchange rate, or linear combinations of them. This paper tests for evidence of contagion between selected East Asian stock markets, thereby exploring the importance of the linkages between stock markets as a transmission channel during the crisis. [ABSTRACT FROM AUTHOR]

The aim of the paper is to develop pricing formulas for long term European type Asian options written on the exchange rate in a two currency economy. The exchange rate as well as the foreign and domestic zero coupon bond prices are assumed to follow geometric Brownian motions. The emphasis is devoted to the discretely sampled Asian option. It is shown how the value of this option can be approximated as the sum of Black-Scholes options. The formula is obtained under the extension of results developed by Rogers and Shi (1995) and Jamshidian (1991). In addition bounds for the pricing error are determined. Comparing with Monte Carlo simulation the pricing is found to be very precise. [ABSTRACT FROM AUTHOR]

The paper evaluates monetary policy and its relationship with the exchange rate in the five Asian crisis countries. The findings are compared with previous currency crises in recent history. It is found that there is no evidence of overly tight monetary policy in the Asian crisis countries in 1997 and early 1998. There is also no evidence that high interest rates led to weaker exchange rates. The usual tradeoff between inflation and output when raising interest rates suggested the need for a softer monetary policy in the crisis countries to combat recession. However, in some countries, corporate balance sheet considerations suggested the need to reverse overly depreciated currencies through firmer monetary policy. [ABSTRACT FROM AUTHOR]