Tony Cavoli

Open economy inflation targeting arrangements and monetary policy rules: Application to India

Purpose - The purpose of this paper is to explore whether India is a suitable candidate for an inflation targeting regime. It begins by placing Indias monetary policy actions in a broader context by discussing whether the Reserve Bank of India (RBI) should shift from its current policy of heavily managed exchange rates to one involving greater currency flexibility. If the latter is chosen, the selection of inflation targeting would appear an appropriate one. Design/methodology/approach - This paper has analytical, empirical and policy dimensions. Given the recent history of exchange rate centered policy in India, a discussion of the role of the exchange rate is needed. This is presented by the use of an analytical model where we examine how inflation targeting might work with the exchange rate. Then the decision rule from the model (a monetary policy rule (MPR)) is adapted for empirical testing and is estimated to investigate whether an MPR that follows inflation targeting can work for India. Findings - There is some evidence to suggest that the RBI follows an MPR quite inadvertently. The MPR (interest rates) tends to react to current inflation, but there is no evidence that it reacts to forecasts of inflation. Additionally, interest rates do not react at all to the exchange rate. Originality/value - The RBIs operating policy framework and whether it should adopt an inflation targeting arrangement is a highly topical issue that has attracted a great deal of attention in policy discussions in India. Very few papers broach this topic systematically and combine the analytical and empirical considerations.

Managed floating by stealth: the case of Taiwan

Taiwan is among the worlds largest holders of international reserves, having accumulated US

South Asian Exchange Rates Regimes: Fixed, Flexible or Something In-between?

350 billion of foreign exchange as of end 2009. Despite its significance, since it is not a member of the IMF, Taiwan has been relatively under-studied compared to many of its other Asian counterparts. As such, the aim of this paper is to shed a little light on Taiwans exchange rate policies and strategies. Our results reveal a regime that can be characterized as involving some degree of management of the New Taiwanese dollar (NTD). More significantly, we can confirm the existence of an asymmetry in central bank foreign exchange intervention responses to currency appreciations versus depreciations in Taiwan, particularly in the case of nominal effective exchange rates (NEERs). This in turn rationalizes the relative exchange rate stability as well as the sustained reserve accumulation in Taiwan.

The Impact of Trade and Investment Agreements on Australia's Inward FDI Flows

This article presents an analysis of the degree of de facto exchange rate flexibility in the exchange rate regimes for selected South Asian economies, viz., Bangladesh, India, Pakistan and Sri Lanka. Three commonly employed measures of exchange rate classification are used: a simple exchange market pressure (EMP) measure, a GARCH specification and a regression-based model. The article finds strong evidence of limited flexibility in all the South Asian economies—particularly against the US dollar, which can suggest a heavy degree of currency management. While Bangladesh, Pakistan and Sri Lanka effectively have fixed exchange rate regimes vis-à-vis the US dollar, India appears to operate somewhat more as a managed floater with a movement towards greater flexibility in recent years.

Exploring the Case for Monetary Integration between the Chinese Mainland and Hong Kong

International trade and investment agreements are one of the primary instruments of global financial liberalisation. They are enacted to enhance the flows of foreign direct investment (FDI) between signatories by reducing regulatory barriers to investment; promoting stable host investment environments; and guaranteeing investors against non-commercial risk. As a net capital importer, Australia has sought to attract FDI through participation in such accords since the early 1980s. This paper examines the determinants of Australias inward FDI flows - focussing specifically on the effects of trade and investment agreements. Using panel data, we find that both bilateral trade and bilateral and multilateral investment agreements attract FDI flows into Australia, thereby indicating that the policy of enticing FDI through participation in these accords is quite possibly effective.

FDI inflows; how do they interact with non-FDI inflows during crises? Some evidence from Asia

This paper presents an empirical investigation on an important policy issue, namely, whether there is any evidence supporting monetary integration between the Chinese mainland and Hong Kong. We follow two lines of inquiry. First, we present a series of simple tests to find the extent to which trade and/or financial linkages exist between the two regions. Second, we use simple inflation and output differentials and structural VAR techniques to test for the degree of business cycle synchronization between the two regions. The results indicate that there is evidence supporting the existence of trade linkages and that there is also support for the possible synchronization of business cycles. We discuss the implications of this for monetary integration between Hong Kong and the mainland.

The relative importance of capital inflows: some evidence from emerging market economies

This article examines the interactions of FDI inflows with the other components of capital inflows – namely debt, equity and bank – by analysing both the causes and effects of FDI flows, emphasizing those effects that might occur during crisis periods for a small sample of Asian countries: Korea, Indonesia and Thailand. It is found that crisis periods magnify the relationships between FDI and non-FDI inflows and that crises tend to make inflow substitutes, regardless of what the relationship might have been in noncrisis periods.

Determinants of income diversification: evidence from Chinese banks

ABSTRACT This article examines the relative importance of the main components of capital inflows for a sample of emerging market economies. Does composition matter? Is there a nexus between capital inflow components? We assess, firstly, how each capital inflow component reacts to important macro and policy variables, and secondly, how the components themselves interact. We find that bank inflows appear the most sensitive to macro factors, institutions matter more for Latin America and external financial factors matter more for Asia. Further, for Latin America, capital inflows interact largely as complements, while for Asia, any expansion of bank inflows might crowd out FDI and portfolio flows.

Managing Capital Inflows Indirectly? On the Determinants of Monetary Sterilization with Reference to East Asia

ABSTRACT This article presents an analysis of the determinants of Chinese commercial banks’ income diversification decisions. Using a panel dataset comprising 88 Chinese domestic banks from 2003 to 2010, we find that bank diversification reflects a variety of managerial abilities: insolvency risks, cost, capital position, asset scale and ownership structure. A larger ratio of banking assets to gross domestic product and lower interest spread lead to a higher level of diversification. Moreover, national banks and regional banks have different strategic responses to the macroeconomic, and indeed, regulatory environment. Resisting shocks from the banking sector and the macro economy, and supplementing liquidity shortages from intermediation business seem to be the driving forces of national banks to operate in non-banking sectors.

Economic and Financial Interconnections and Income Growth Convergence in Asia: A Real-Financial Nexus?

This paper derives a time-varying sterilization coefficient to examine those factors that determine the extent to which central banks might engage in monetary sterilization. There appear to be good reasons to do so: Sterilization neutralizes the monetary impact of reserve accumulation, which is an endogenous consequence of sustained capital inflows under some degree of management of exchange rates. A pooled sample of Asian economies incorporating Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand, for 1994–2012 is employed. We find that this method does help to directly uncover the determinants of sterilization, and while capital inflows do not appear to influence the sterilization directly, there is substantial evidence to suggest it does so indirectly—particularly through domestic interest rates.