Managing Capital Flows in Asia: An Overview of Key Issues

Abstract

Global capital flows into emerging markets, including those in Asia, continue to be volatile. These capital flows generate both benefits and costs. The latter are associated with episodes of currency and banking crises like the 1997 Asian financial crisis and the 2008 global financial and economic crisis. Recent data show that the main impact of capital flows on the economies of East Asia is reflected in real effective exchange rates, equity prices, and accumulation of foreign exchange reserves. In particular, econometric results show the strong linkages between the United States bond markets and those in Asia, particularly the adverse impact of quantitative easing tapering on Asian economies. These findings support the important role of macroprudential policy, which can be implemented in the context of regional cooperation in order to reduce negative spillovers across economies in Asia.