Title: Decomposing Capital Flows and Assessing the Impact of Capital Flows on Asset Markets: Empirical Evidence from the ASEAN-4 Countries
Abstract: International capital flows have played an increasingly important role in the business cycles of high-income and middle-income countries, especially after the episodes of financial crises. Capital flows to the Asian countries in the recent decade have displayed an unpredictable pattern and its volatility intensified during the onset of the Global Financial Crisis (GFC) in 2008. Following the Lehman Brothers failure, risk aversion heightened resulting in a temporary reversal of capital inflows for most Asian countries. However, these capital flows quickly rebounded in mid-2009, partly due to the strong fundamentals of the Asian economies. Undeniably, the benefits of capital inflows are debatable, as one of the main challenges the policy maker has to deal with is the liquidity that could potentially cause asset price booms and the creation of asset bubbles. In this context, the first part of the paper attempts to decompose the capital flows into ASEAN-4 countries pre and post GFC and identify the periods of “surge”, “stop”, “flight” and “retrenchment”. The second part of the paper attempts to establish the link between the pattern of capital flows and the asset price cycles. While findings show that the capital flows have a small impact on asset price boom and subsequently the bust of the asset price cycle after eight quarters, it has however shown that excessive deviations of house prices from its underlying fundamentals causes imbalances in the asset market.
Publication Year: 2014
Publication Date: 2014-01-01
Language: en
Type: article
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