How Capital Flows in the Midst of Excess Savings Affect Macrofinancial Vulnerability

Asian Development Review, vol. 32, no. 2, pp. 115-152, 2015

38 Pages Posted: 21 Nov 2015

See all articles by Iwan J. Azis

Iwan J. Azis

Cornell University

Damaris Yarcia

Asian Development Bank

Date Written: November 19, 2015

Abstract

In contrast to the period prior to the 1997/98 Asian financial crisis, emerging East Asia today is a region with excess savings, particularly corporate savings. Beginning in the mid-2000s, liquidity was further amplified by massive capital flows, particularly bank-led flows, and subsequently by debt-led flows following the introduction of quantitative easing in the United States. Both types of inflows are critical for bank-dependent Asia in need of long-term financing for infrastructure development. Yet, these two types of capital flows are also the most volatile. The surge of inflows in the midst of excess savings helped raise liquidity and growth, but also posed serious challenges to financial stability. As revealed by flow-of-funds data, the risk-taking behavior of economic agents and their preferences toward financial assets increased. Bank-led flows increased noncore liabilities and caused a credit boom, elevating the risk of procyclicality, while debt-led flows raised the vulnerability to a reversal of flows. These inflows also lowered the effectiveness of monetary policy, underscoring the need to supplement standard measures with a more effective macroprudential policy.

Keywords: capital flows, excess savings, flow-of-funds, procyclicality, risktaking behavior

JEL Classification: E44, F32

Suggested Citation

Azis, Iwan J. and Yarcia, Damaris, How Capital Flows in the Midst of Excess Savings Affect Macrofinancial Vulnerability (November 19, 2015). Asian Development Review, vol. 32, no. 2, pp. 115-152, 2015, Available at SSRN: https://ssrn.com/abstract=2693307

Iwan J. Azis

Cornell University ( email )

West Sibley Hall
Ithaca, NY 14853
United States
607-255-4271 (Phone)
607-255-6681 (Fax)

Damaris Yarcia (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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