Maria Socorro Gochoco-Bautista

Asset Prices and Monetary Policy: Booms and Fat Tails in East Asia

Do housing and equity booms significantly raise the probability of extremely bad outcomes at the margin? This study addresses this question for a group of 8 East Asian countries. The main findings are the following: (i) Asset price booms in housing and equity markets, either separately or jointly but especially in housing, significantly raise the probability at the margin that (a) the real output gap will be in the left tail of its distribution, in which output is significantly below trend, and (b) the price-level gap will be in the right tail of its distribution, in which the price level is significantly above trend. At the margin, the risk of the occurrence of these particular tail events due to asset price booms is largely asymmetric and does not apply to the tails of good outcomes; and (ii) Expected real output and price level outcomes that are either obtained without conditioning on asset price booms or are obtained conditional on asset price booms using the normal approximation underestimate the risk of tail events and lead to less pessimistic but misleading inferences. One implication for monetary policy is that an approach that is ex-ante more compatible with risk management may be appropriate.

How Effective are Capital Controls in Asia

This study examines the effects of capital account restrictions on capital flows in nine Asian economies over the period 1995–2005 using panel regressions with fixed effects. The results show that capital controls significantly affect capital flows when such flows are disaggregated by asset type and direction of flow. Tests for the presence of possible asymmetric effects, substitution effects, and endogeneity of capital controls are conducted.

Periods of currency pressure: Stylized facts and leading indicators*

The de-facto devaluation of the Thai baht in July 1997 began the currency turmoil in Asia. Speculative pressures on a currency may sometimes lead to large changes in the nominal exchange rate, but can also be prevented through foreign exchange market intervention and/or high domestic interest rates. This study uses monthly data for the Philippines over the period 1980 to 1997 to identify currency pressure periods and decipher stylized facts by examining the behavior of certain indicator variables during currency pressure periods and during tranquil periods. A probit model is used to determine which of the indicator variables significantly explain the probability that such currency pressures will occur.

Capital controls: a pragmatic proposal

The strong and volatile rebound of capital inflows, mostly portfolio investments, into emerging economies in the recovery process of the 2008 global financial crisis has brought the issue of capital controls to the forefront once again. The presence of global imbalances and unconventional monetary easing in advanced countries has added new complexity to the controversy surrounding their use, as ‘currency wars’ became a hot button political issue. While the International Monetary Fund’s (IMF) recent openness to the use of capital controls has drawn positive reactions from emerging economies, its framework is still perceived as complicated, intentionally vague, and difficult to implement. To complement the IMF’s new framework and make it easier to operationalize, this paper proposes a pragmatic approach to the use of capital controls which leverages the G20 indicative guidelines in measuring excessive imbalances in order to simplify the IMF’s guidelines on the use of capital controls. Our proposal, which argues for the absence of persistent current account imbalances as a precondition to the use of capital controls, is anchored on the principle that a country’s sovereign right to use all available tools and implement policies that they deem best should be respected as long as there are no substantial negative externalities on other countries.

Going Regional: How to Deepen ASEAN’s Financial Markets

This study identifies the key issues involved in the further development and deepening of financial markets in the Association of Southeast Asian Nations (ASEAN). For the smaller ASEAN countries, the first priority is the development of the banking system. In the larger ASEAN+3 economies, banking systems are already reasonably well-developed, while stock markets and government bond markets have evidently achieved critical mass even while remaining purely domestic markets. The tug-of-war between the geography of information in the direction of more localized markets versus the critical mass required by network externalities makes the case for regional integration stronger for corporate bond markets than for other financial markets. The study proposes three bold initiatives to develop a deep and liquid regional corporate bond market.

Income Polarization in Asia

The subject of this study is income polarization, an important but neglected dimension of income distribution. Estimates of two measures of income polarization are obtained for the population, rural, and urban sectors using household survey data on expenditures per capita for a sample of Asian countries. The findings include the following: Income polarization and inequality, the latter measured using the Gini coefficient, are highly positively correlated; in most countries, urban income polarization is higher than rural income polarization; and lastly, higher rates of growth in GDP and per capita GDP, higher levels of educational attainment of household heads, and high rates of employment in manufacturing may be important in keeping income polarization at low levels.

Corporate Investments in Asian Emerging Markets: Financial Conditions, Financial Development, and Financial Constraints

This paper explores the mechanisms through which finance affects corporate investments and capital accumulation. We separate the effects of financial conditions from those of financial development. Based on a sample of firms from five Asian emerging economies, we find that (i) financial conditions affect firms’ growth opportunities and investment demand, while financial development primarily affects firms’ external financing constraints; (ii) large firms benefit more from improved financial conditions, while small firms benefit more from financial development; and (iii) these effects are asymmetric—in general, stronger when the global financial crisis was unfolding and weaker during the subsequent rebound.

Output Movements in East Asia: Is There a Regional Factor?

Using Lumsdaine and Prasads (2003) methodology to construct a measure of the common component of industrial output fluctuations with time-varying weights, this study finds that there is a significant regional factor that explains the movement in industrial production output across countries in East Asia (ASEAN 5 + 3). The cumulated common component for East Asia has very distinct peaks and troughs, with turning points occurring about every three years. Shocks in 2000-2001, coinciding with the bursting of the IT bubble, appear to be very important as there is a very large decline in the common component of industrial production output, larger than that experienced during the 1997 Asian Financial Crisis. Similar to McKinnon and Schnabls (2003) findings, the Japanese economy is important for the region as its industrial production output cycle has the largest weight in the construction of the cumulated common component for the region and appears to be the most similar to it. Nevertheless, Chinas asymmetry with the cumulated component for the region appears to have been beneficial for the region, especially in the most recent period.

An Assessment of the Usefulness of Money for Policy in the Philippines

This study assesses the usefulness of money for policy in the Philippines. The basic idea behind the use of monetary aggregates for policy is that observed fluctuations in money anticipate movements in the ultimate objective of monetary policy, such as inflation control. The paper examines the stability of key empirical relationships, including the behavior of velocity and the presence of cointegrating relationships among money and variables of interest to policymakers. In general, results indicate that the stability of velocity and the presence of cointegrating relationships lend some limited support to the potential usefulness of money for policy. The ability of money to predict inflation is examined using Granger causality tests and an unrestricted vector autoregression (VAR) that examines the relative contribution of innovations in money to the variance of the forecast errors in inflation. In general, moneys ability to predict inflation is less clear-cut and seems to be dependent on the ordering and lag lengths of the variables used in the VAR and the definition of money used.

Effectiveness of Capital Restrictions: Do Regional and Income Differences Matter?

This study examines the differences in the effectiveness of de jure capital restrictions across economies in different regions (Asia versus non-Asia) and with varying income levels. It uses a panel of 45 economies over the period 1995– 2007. The results show that differences in regional and income levels matter for the effectiveness of capital restrictions.