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1、Financial Liberalization and Monetary PolicyCooperation in East AsiaAuthor： Hwee Kwan Chow, Peter N. Kriz, Roberto S. Mariano and Augustine H. H. TanNationality: SingaporeSourse and Type: SMU Economics and Statistics Working Paper,Series Http:/unjobs.orgJournal time: May 2007,P2-3,5-7,21It is well r
2、ecognized that strong domestic financial markets can play a key role in economic growth and development. Sound financial institutions and well-functioning markets facilitate the mobilization and efficient allocation of savings, thereby improving productivity and contributing to growth (Levine 2004).
3、 This is particularly important for East Asia in view of the high saving rates of the regional countries. The limited development of local financial markets and their small fragmented nature have also led to a large part of Asian savings being intermediated outside the region. Surplus savings have m
4、ostly been channeled to the US and the funds return to Asia through US direct and portfolio investment. Fostering domestic financial markets and regional financial integration is important because it not only facilitates the intermediation of Asian savings within the region, but also attracts foreig
5、n investment in instruments denominated in the domestic currency. Such alternative sources of funding would reduce East Asias reliance on foreign currency borrowing and concomitantly, the risk exposure of the region to maturity and currency mismatches.However, as the countries in East Asia deregulat
6、e their financial sectors and develop their capital markets, a key issue that confronts policymakers is the greater complexity of risks that is injected into the financial system. In particular, capital account liberalization heightens the speed and magnitude of international spillovers and may pote
7、ntially increase the vulnerability of individual countries to external financial shocks. Many studies have found empirical evidence that financial development and in particular, financial openness can increase a countrys vulnerability to crisis (see inter alia Rajan 2005 and Kaminsky and Reinhart 20
8、03). In fact, considerable blame for the past financial cum currency crises has been placed on improper sequencing of liberalization.Over the past quarter century, the combination of a fixed exchange rate with an open capital account, has proven lethal in small open economies, particularly in emergi
9、ng markets with weak financial systems and regulatory institutions. The fault seems to point to policies that opened the capital account prematurely while keeping the exchange rate rigid. Such a combination has often led to massive capital inflows that have overwhelmed nascent financial systems, pro
10、mpting consumption and asset boom-bust cycles. When we further combine a fixed exchange rate and premature opening of the capital account with a weakly structured and regulated domestic financial sector, currency crisis quickly turn into financial crisis and perhaps to full-blown economic and politi
11、cal crisis. Such a scenario plagued Latin America throughout the 1980s and 1990s. It took the crisis of 1997-98 to demonstrate that Asia was also not immune to these same policy inconsistencies.Sufficiently liberalized and developed domestic financial sectors are necessary to absorb and allocate cap
12、ital inflows to their most efficient uses. Flexible exchange rates allow necessary international relative price adjustments and help allow asset markets to clear (Obstfeld 2004). Without exchange rate flexibility, economic adjustments will take place in terms of the price level, output or employment
13、, or asset market volatility (Frankel and Rose 1995). Unless domestic financial sectors are sufficiently developed and exchange rates sufficiently flexible, capital account liberalization is premature and effectively neutralizes the stability benefits of fixed exchange rates. That this does so at a
14、time when the domestic financial infrastructure can ill-afford massive surges and reversals in liquidity and financing, has prompted a number of economists to remind policymakers and professional economists alike of the dangers of the open-economy trilemma.Fully-open capital accounts require both do
15、mestic financial liberalization and exchange rate flexibility.This paper advocates the optimally cascading of financial liberalization that is consistent across three dimensions: extent of domestic financial liberalization; the degree of exchange rate flexibility; and the scope of capital account li
16、beralization.2.1 Optimal SequencingUnder optimal sequencing, liberalization occurs sequentially. Let A.thE A ,.，represent the i of n different stages of domestic financial thsector liberalization. Let B. e BjBJ represent the i of n different degrees of exchange rate flexibility. Here, one can think of B j as a pegged bilateral exchange rate and Bas a fully floating exchange rate. Finally, thlet C.CJ represent the i of n different stages of capitalaccou
