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Friday, 28th November 2014

Facing the Flood: How Asia Is Coping With Volatile Capital Flows

Source: Chatham House

From Introduction:

This paper examines how Asian economies are coping with shifting capital flows between safe and emerging market risk assets under the prevailing ultra-loose monetary conditions. Since the US dollar is the dominant international currency and reserve currency, the supply of global liquidity has fluctuated along with the monetary and financial conditions of the United States. The near financial meltdown in the US in September 2008 triggered chronic shortages of dollar liquidity globally. When the US Federal Reserve (Fed) lowered interest rates to zero and embarked on quantitative easing, a tsunami of money flowed to emerging markets as investors sought high-yielding assets. The ultra-loose monetary conditions have fuelled credit and asset bubbles in emerging markets. But during periods of market stress such as that in May 2013, when the Fed first signalled the start of its asset purchase reduction, investors became risk-averse and hot money exited emerging markets to the ‘safe haven’ of dollar reserve assets with a speed and on a scale that were destabilizing to the underdeveloped financial markets of emerging economies.

This paper demonstrates how the small but completely open Asian markets have struggled to achieve exchange rate, monetary and financial market stability in an increasingly interconnected global market. The challenges posed to Asia and its policy responses provide important lessons to emerging markets in terms of the optimum pace and sequence of capital market opening and the measures needed to reduce the risks of capital flows.

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Having begun his career in academic libraries, Adrian Janes has subsequently worked extensively in public libraries, chiefly in enquiry work as an Information Services librarian. In this role he has had particular responsibility for information from both the UK Government and the European Union. He wrote a detailed report on sources for the latter which was published by FreePint in 2007, and has contributed articles to FreePint and ResourceShelf. He is involved in training in information literacy and the use of online reference resources.

A Contributing Editor to DocuTicker, he also write reviews for Pennyblackmusic.

More articles by Adrian Janes »



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