The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?

Abstract

In recent years, emerging East Asian economies have experienced large capital inflows—especially a surge in portfolio inflows—and an appreciation of asset prices such as equities, land, and both nominal and real exchange rates. The paper reviews why a surge in capital inflows can increase asset prices, and then empirically investigates the effects by employing a panel vector autoregression (VAR) model. The empirical results suggest that capital inflows have indeed contributed to the asset price appreciation in this region, although capital inflow shocks explain a relatively small part of asset price fluctuations. How to manage these capital inflows is also discussed.