Cross-Border Capital Flows in East Asia: Impact of Monetary Policy Measures

Abstract

Despite the ASEAN Community Vision 2025 plans to deepen and develop monetary and financial cooperation within member states, regional markets differ significantly from each other in the level of development and overregulation. Among ASEAN-5 countries, Singapore has the most developed and large financial market with the least number of applied restrictions. The remaining countries (Malaysia, the Philippines, Indonesia and Thailand) control virtually all capital account transactions. The examined five countries practice soft peg exchange rate regimes: a stabilized arrangement and a floating. Indonesia and Singapore apply a stabilized arrangement, and Malaysia, Thailand and the Philippines apply a floating. The regression analysis results show that changing exchange rate regimes of ASEAN-5 countries to a hard peg (a single currency basket) will have a significant effect on the volume of issued bonds in four of the five studied countries (all except Thailand). Indonesia will have the greatest effect of the exchange rate regime change. Thus, revaluation of the value of the East Asian currencies basket against USD by 1% will reduce the volume of issued bonds in Indonesia by 3.79%, and devaluation, on the contrary, will increase by the same amount. Consequently, Indonesia and other countries under study will have to continue the competitive devaluation policy against USD in order to have a positive effect of changing exchange rate regime. But in this case it will be a coordinated devaluation of all East Asian currencies and not a currency war. It is worth noting that the correlation between the volumes of bonds issued in national and foreign currencies in all the studied countries and fluctuations of East Asian currencies against each other and to USD is much weaker than the effect of the single currency basket. And in the case of the Philippines this correlation is not at all.