Multilateral aspects of - the capital flow management measures - - PowerPoint PPT Presentation

Pornpinun Chantapacdepong

Monetary Policy Group Bank of Thailand

Multilateral aspects of the capital flow management measures

• The views expressed in this presentation are those of the authors

and do not necessarily represent those of the Bank of Thailand.

Motivati ation

• n
• There was little

e conce ncern about t the spillo lover er effects ects of capital controls … It is widely agreed that capital controls have no significant effects on aggregate volume of capital inflows as it can

• nly shift the composition and lengthen maturity of flows.

What if the control successfully reduce the volume of certain types of flows into a country, but simply shift the challenges of large inflows into other countries.

What this paper does…

• Exami

mine cross market t linkages within EAEs:

by measu surin ing g correla elation ions s of volatilit ility/shoc /shocks s in stock returns ns and in net foreig eign n equity ity flows.

• Identif

tifies s the mechanism sm of the spread ad of turmoil moil across s countr trie ies in the region. Volatil tility ity spillo

lover er (pure e contagion tagion vs vs inter erde depe pende ndence ce)

• Analyze

ze whether r unilate tera ral l movements nts create tes s side effects cts to neighbori ring countr tries. s.

3

What this paper does not do…

• Prove

e whether her the coordinate dinate action

• n is

superior erior to unilate ateral ral capital al flow measures

• Asses

ess effecti ctivenes eness of capita tal l flow measur ures es vis-à-vi vis its objecti ctive. e.

4

Organ anizati ization n of study

• Challeng

llenge from volatile tile capital tal flows

• Eviden

dence ce of volatil ility ity spillo lover er in EAEs

• Multilate

tilateral ral effects cts of the Capital tal flow manag agement ement measur ures es (CFMs)

5

6

‘Challenges’ to EAEs from m volati atile le capital al flows

Inflows are mainly for portfolio investment…

Source: Pradhan et. Al. (2011) Note: NIEs of Asia includes Hong Kong, Korea, Singapore, and Taiwan

Net private capital flows, 1990-2010 (% of GDP, 4 quarters MA)

8

…with the trend of larger inflows going forward

Centr ntral l bank k balance sheets ts (% of GDP)

Source: Credit Suisse (29 February 2012)

Unfor

• rtu

tunate ately, , EAEs s have financ ncia ial markets s with h limited ted absor

• rpti

ptive capac acit ity.

Billions USD Stock market size Bond market size FX market size Thailand 218 180 7.4 Malaysia 90 183 7.3 Indonesia 130 98 3.4 Philippines 27 55 5.0 Singapore 282 115 265.9 Korea 1,627 1,085 43.8 Japan 4,280 11,521 312.3 USA 30,455 25,064 904.4

Source: WDI and BIS Note: Stock market, total value at end-2010; Domestic debt securities, amount outstanding at end-2009; FX, average daily turnover in April 2010

9

10

How connec ected ted are these se volati atile le capital al flows in EAEs? and by which h mechani anism? sm?

Data a and methodolo dology

• The time varying cross

s market t correlatio lation coefficie cients nts was calcul ulate ated d by DCC GARCH model l (Engle, 2002 2002)

• Event

t studie ies s for multilate ateral al impacts ts of the announ unce cemen ment t of capital al flows measur ures s (CFMs) in EAEs during ng 2009 2009-2010 2010.

• Using stock market

t data: 1) Equity y price (1992 1992-prese sent) nt) 2) Net foreign equity ty flows (2006 2006-pr present) nt)

11

Define ine pure e contagio agion n versus us interde depende pendenc nce

• This study

y follows definiti ition of Forbes and Rigobon (2002 2002) and Masson (1998 1998, , 1999 1999). ).

• Contag

agio ion: n: crisis is was triggered d and spread ad by investor’s psychological behaviour or panic movements ts rather r than being induced d by economic ic fundamental amental links. .

• Interde

depe pende dence ce/spil spillo lovers rs: : a crisis is in a countr try y affects cts the fundam amental ntal of the neighbour urs s through trade de or financial cial linkages. s.

12

How to test t for existenc stence e of contagion agion?

• The examinati

ation simply y tests s if this volatili ility ty transm nsmissi ission

• n changes

s significantl cantly y after r the shocks s

• r crisis

is.

• Contag

agio ion is defined d as a significant icant increase ase in cross-mar arket t linkages s (co-movemen ment) t) after r shock.

• Interde

depe pende dence ce or spillovers: : two markets ts show a high degree of co-movemen ment t during period d of stabili ility/ ty/the the co-movement ment does not increase ase significan icantl tly y after r shock.

13

14

Compar mparing ing the two episode sodes s

• f calm periods

iods: the degree

• f financial interdependence

has increased from the pre- Asian crisis (1992-1996) to the pre-US crisis period. During ing the crisis sis period iod, implied correlation for the equity return among ASEAN markets increase sharply in both the 1997 and 2008 crisis, however, the latter event incurs a more dramatic rise Crisis in one country could coordinate investor expectations. The co-movement in price would exist because of correlation in memories rather than fundamental.

15

Condit nditio ional nal correlation elation coefficien icient t of stock returns ns (Thailand ailand as a crisis sis originator ginator in 1997 1997)

16

Condit nditio ional nal correlation elation coefficient icient of stock returns ns (Thailand ailand as a crisis sis origina ginator tor in 1997 1997)

17

Condit nditio ional nal correlation elation coefficient icient of stock returns ns (US US as a crisi sis s origina ginator tor in 2008 2008)

18

Condit nditio ional nal correlation elation coefficien icient t of stock returns ns (US US as a crisi sis s origina ginator tor in 2008 2008)

Impacts of shock originated within EAEs could be more severe than those created outside the region

• Recentl

ntly, there’s significant increase in the pair-wise conditional correlation among Asian countries itself.

• Coefficients are even stronger than in comparison

with the US.

• One could link this phenomenon to the increased

financial integration, which has intensified contagion effects across markets.

19

20

Policy cy respo ponse nse of each country ntry in EAEs?

Capit ital al Flow Managem ement ent Measures es (CFMs) become popular lar toolkit its among EAEs

TW ID IN MY TH PH KR Dec 09 09 Feb 10 10 Oct 10 10 Nov 10

10

Dec 10 10 Jun 10 10 Nov 09 09 Sep 10 10

Limit it NR access ess to deposit it account Restric rictio tion

• n
• n ex

external borrowin ing Min holding periods ds & limit access ess to to CB bills Liberal raliz ize e

• utflo

lows Limit it priva vate te FX ex exposure Furthe ther Liberaliz lize

• utflo

lows Liberal raliz ize e

• utflo

lows Withholding ing tax on bonds Restric rict t NR portfolio lio inve vest t & ST bond Liberaliz lize

• utflo

lows Restric rictio tion

• n ex

external borrowin ing1/ Withholding ing tax on bonds (in Jan 11 11)

Note: : 1/Bank k levy in 2011H2 2 for Korea; Limit it bank k ST borrowin ing in Mar 11 11 and raise RR on FCD in Mar & Jun 11 11 for Indonesia ia

Raise reserve Requir ireme ment t on fore reign ign deposits its

10 10 9 13 13 16 16 12 12 18 18 9 30 30 19 19 30 30 30 30

Capital ital Flow w Manag agemen ement Measur ures (CFMs) s)-with with announcem

• uncement

ent date

22

Is there re external ernality ity of the CFMs?

Previ vious us litera ratur tures s on spillover effect cts s of the CFMs

• Forbes et al. (2011

2011) found that capital control in Brazil cause investors to change their portfolio allocation in such away that:

• 1. reduce allocation to Brazil
• 2. reduce allocation to countries believed to be more likely to use

control

• 3. Increase allocation to other country in Latin America that

have fewer restriction on capital flows

• Effect of capital control is through signaling rather than

direct cost of the controls

Previ vious us litera ratur tures s on spillover effect cts s of the CFMs

• Accor
• rdin

ing g to Edison

• n and Reinha

hart t (2001 2001), equity ity markets ets continu ntinue to be inter erna nationa tionall lly linked ed, despite ite the introduc

• ductio

tion n or escala lation tion of capital l contr trols

• ls during

ing the Asia ian n financ ncia ial l crisis is.

• In addition

tion, follo lowin ing g the introduc

• ductio

tion n of the capita tal l contr ntrols

• ls, one should
• uld expect

t the follo lowing ing phenom

• mena

ena in the financ ncia ial l variable les 1) A decline ne in volatili tility ty spillo lover; ; 2) A structu tural l breaks ks around nd the introdu

• duction

tion of controls

• ls

3) less contem tempor poraneo neous moveme ment nt with h inter erna nationa tional l varia iable les

Capit ital al Flow Managem ement ent Measures es (CFMs) become popular lar toolkit its among EAEs

TW ID IN MY TH PH KR Dec 09 09 Feb 10 10 Oct 10 10 Nov 10

10

Dec 10 10 Jun 10 10 Nov 09 09 Sep 10 10

Limit it NR access ess to deposit it account Restric rictio tion

• n
• n ex

external borrowin ing Min holding periods ds & limit access ess to to CB bills Liberal raliz ize e

• utflo

lows Limit it priva vate te FX ex exposure Furthe ther Liberaliz lize

• utflo

lows Liberal raliz ize e

• utflo

lows Withholding ing tax on bonds Restric rict t NR NR portfolio lio inve vest t & ST bond bond Liberaliz lize

• utflo

lows Restric rictio tion

• n ex

external borrowin ing1/ Withholding ing tax on bonds (in Jan 11 11)

Note: : 1/Bank k levy in 2011H2 2 for Korea; Limit it bank k ST borrowin ing in Mar 11 11 and raise RR on FCD in Mar & Jun 11 11 for Indonesia ia

Raise reserve Requir ireme ment t on fore reign ign deposits its

10 10 9 13 13 16 16 12 12 18 18 9 30 30 19 19 30 30 30 30

Capita pital l Flow Mana nagement nt Measur ures (CFMs)-with ith announ

• uncement

ment date

Finding ding

• Primar

imary impact act of capital ital contr trol

• l is not the direct

ect cost to inves estors tors, , but a signalin aling g effec ects of governm nmen ent t less suppor pportive e to foreign ign portf tfolio

• lio flows.

s.

• Measu

sure e targete eted d fixed d income

• me invest

stme ment nt could ld have e signif nificant icant effec ects ts on equit ity investme stment if controls ls cause se polic icy uncer ertain ainty risk

The findin ing g sugges est externalit alities ies of the CFMs

Count ntry Dampe pen market t vo volat atili ility Reduce co - moveme ment nt with internat national

• nal

variab ables External naliti ities 16 16 Jun 10 10: Indonesi sia a - Minimum holding period on central banks bill Yes, temporary Yes, temporary Yes, raise volatility inTW 12 Oct 10: Thailand and - withholding tax on bonds Yes, temporary Yes, temporary Yes, raise volatility inTW 9 Nov 10: Taiwan- restrict NR investment in portfolio markets & ST govt bond Yes, temporary Yes, temporary Yes, raise volatility in KR 18 Nov 10: Kore rea - withholding tax on bond Limited impact none none

• Measure in Thailand diverts the flows

away to Taiwan

• Pair-wise correlation decline due to

lower volatility of flows into Thailand and higher volatility in Taiwan

Conclu lusi sion

• n
• Althoug

ugh CFMs may have tempora raril rily y reduce ce the portf tfolio lio flows into a country, , it may occur r at the expense se of other r countrie ries. s.

• If severa

ral l countrie ries s adopted d controls ls as part of standa dard d policy y toolkits, its, spillover r effect ct could d be substant tantial. ial.

• This support

t the role for internati ational al coordin dinatio ation or oversig ight ht of the use of control

• l to

avoid d external nality ity.