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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]

Ebbs and flows of capital have complicated macroeconomic policy management for all emerging market and developing economies (EMDEs) regardless of whether they have adopted flexible or managed exchange rate regimes. In the light of the renewed interest in the trilemma versus dilemma debate, we contribute to the related literature by presenting an empirical analysis of exchange rate flexibility and intervention for selected Asian EMDEs over the time period 2001–2016. In addition to estimating augmented Frankel–Wei regressions, we employ a generalised auto‐regressive conditional heteroscedasticity (GARCH) model to assess the extent of foreign exchange (FX) intervention and whether there exist any asymmetries in the way countries intervene. Our results show that although there is greater flexibility in exchange rates, there is evidence of some countries potentially using FX intervention to manage currency movements. We also find evidence of asymmetry in intervention where exchange rate volatility responds more emphatically to FX sales than purchases. [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]

This paper steps back from the detail of the Asian crisis, to ask whether the 1997 crisis advanced our broad understanding of the age-old problem of economic crises. Some immediate lessons were learned from the failures of the crisis-response in Indonesia, which was the worst-affected economy. It is notable, however, how little changed to address the ongoing systemic weaknesses. Three areas of unresolved vulnerability can be identified. First, the sudden stops and reversals of international capital flows. Second, the intrinsic fragility of a financial system that borrows short and lends long. Third, unanchored exchange rates, where the market's price-discovery can take the rate to levels far from equilibrium, for sustained periods. For more than a decade after the Asian crisis, international capital flows continued to be seen as unambiguously beneficial, with any attempts at capital flow management rejected. At a global level, it was not until the 2008 financial crisis that widespread financial fragility was addressed through tighter regulation and higher capital requirements. On exchange rates, misleading advocacy of corner solutions-either pure floating exchange rates or immutable fixed rates-continued in the face of the real-world experience that sometimes intervention is needed to maintain an exchange rate close to equilibrium. [ABSTRACT FROM AUTHOR]

Background: Modeling exchange rate volatility has remained crucially important because of its diverse implications. This study aimed to address the issue of error distribution assumption in modeling and forecasting exchange rate volatility between the Bangladeshi taka (BDT) and the US dollar ($). Methods: Using daily exchange rates for 7 years (January 1, 2008, to April 30, 2015), this study attempted to model dynamics following generalized autoregressive conditional heteroscedastic (GARCH), asymmetric power ARCH (APARCH), exponential generalized autoregressive conditional heteroscedstic (EGARCH), threshold generalized autoregressive conditional heteroscedstic (TGARCH), and integrated generalized autoregressive conditional heteroscedstic (IGARCH) processes under both normal and Student's t-distribution assumptions for errors. Results and Conclusions: It was found that, in contrast with the normal distribution, the application of Student's t-distribution for errors helped the models satisfy the diagnostic tests and show improved forecasting accuracy. With such error distribution for out-of-sample volatility forecasting, AR(2)-GARCH(1, 1) is considered the best. [ABSTRACT FROM AUTHOR]

Malaysia gained attention for its use of capital controls in 1998, but since the early 2000s it has emphasised its commitment to an open capital account, despite experiencing volatile capital flows. As well as opting for financial openness, Malaysia chose to manage the value of its exchange rate after de-pegging from the US dollar in 2005. In a bid to escape the macroeconomic constraints that arise from capital mobility, Malaysia also chose to sterilise a large portion of capital inflows. It then made a further choice to use market-based sterilisation instruments more than regulatory sterilisation measures. These choices have carried costs and led to a build-up of economic risk. Three interrelated factors explain these choices: Malaysia’s strategy to manage the stigma arising from its imposition of controls in 1998, the increased level of financial integration that followed from this strategy, and the politically privileged position of groups that have benefitted from Malaysia’s commitment to capital openness. [ABSTRACT FROM PUBLISHER]

To forecast exchange rates, this paper proposes a new semiparametric smooth transition autoregressive model by allowing state variables to enter into the transition function in a nonparametric way. We propose a three-stage estimation procedure to estimate both the parametric and nonparametric parts in the new model, and a simulation study is conducted to demonstrate satisfactory finite sample performance. The empirical results, based on the proposed model applied to forecasting five major Asian exchange rates, show that the new model has some advantages in out-of-sample forecasting performance. [ABSTRACT FROM AUTHOR]

Abstract: In this paper, we focus on the determinants of foreign direct investment and foreign portfolio investment. Applying static and dynamic panel data models of six Asian countries and seven Latin American countries in the period from 1981 to 2011, we find that the characteristic of capital flows has locality, and both domestic and global factors can explain the capital flows to emerging markets, such as GDP, trade openness, financial interrelations, and interest rates. The result also shows expectation is an important driving factor: FDI is more prone to be affected by economic expectation while FPI is exchange rate expectation. [Copyright &y& Elsevier]

The article analyzes the effect of worker remittances (WR) on the equilibrium real exchange rate (ERER) in recipient countries. It shows that in many countries, WR arrests official development assistance and private capital flows, which could cause macroeconomic problems by raising ERER. One conclusion drawn is that Dutch disease problems may not be a necessary side effect of remittance inflows, which are said to be larger in Asia and Latin America than in Africa and eastern Europe, mainly because countries such as India and Mexico receive more WR.

In recent years, emerging Asian economies have experienced (i) large capital inflows, especially a surge in portfolio inflows, and (ii) an appreciation of asset prices such as stocks, land, and nominal and real exchange rates. We empirically investigate the effects of capital inflows on asset prices by employing a panel VAR model. The empirical results suggest that capital inflows indeed have contributed to asset price appreciation in the region, although capital inflow shocks explain a relatively small part of asset price fluctuations. [ABSTRACT FROM AUTHOR]

The article discusses the results of a study regarding the transmission of world shocks to emerging-market (EM) countries Asia and Latin America. The study showed that exchange rate regimes and restrictions on capital flows are the crucial factors in assessing the discrepancies in the transmission of shocks across EM countries. It also concludes that regional groups and trade openness are not important in determining the transmission of business cycles.

The nexus of real exchange rate (RER) and capital inflows is examined through a comparative analysis of the experiences of emerging market economies in Asian and Latin America during the period 1985-2000. It is found that the degree of appreciation in RER associated with capital inflow is uniformly much higher in Latin American countries compared to their Asian counterparts, despite the fact that the latter experienced far greater foreign capital inflows relative to the size of the economy. The econometric evidence suggests that both the composition of capital flows and differences in the degree of response of RER to capital flows matter in explaining these contrasting experiences. While RER appreciation is a phenomenon predominantly associated with other (non-FDI) forms of capital inflows (OCFW), a given level of OCFW brings about a far greater degree of appreciation of the real exchange rate in Latin America where the importance of these flows in total capital inflow is also far greater. On the policy front, Asian countries seem to have used fiscal contraction and nominal exchange rate adjustment more effectively to cushion the RER against the appreciation pressure of capital inflows. There is, however, no evidence to suggest that sterilised intervention can generate a lasting impact on the real exchange rate. [ABSTRACT FROM AUTHOR]

Discusses the bank liquidity crises in Asia, highlighting the concept of international illiquidity. Role of domestic banks in causing and transmitting situations of illiquidity; Description of the demand deposit system; Role of maturity of external debt and capital flows; Implications of adopting different exchange rate regimes; Relation between banking crises and real exchange rate movements.