Since the early 20th century, emerging Asia has been subjected to the ebb and flow of lending from advanced economies. Since then the region has become more integrated into the global financial market, which has been exposed to the risk of capital flow reversals.

In the aftermath of the 2008 global financial crisis, capital has flowed into emerging economies, especially in Asia, in search of higher returns on investment.

Low interest rates in advanced economies made Asia more attractive, with its higher interest rates promising bigger returns.

This worries the region’s policy makers. Portfolio investments are more volatile and short-lived than long-term foreign direct investments. A surge in inflows harms recipient countries, as asset prices soar, and a sudden withdrawal of capital destabilizes markets.

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http://bit.ly/2yniDUp

Read the working paper

https://www.adb.org/publications/correlations-equity-markets-asia-and-impact-capital-flow-management-measures

Author

Pornpinun Chantapacdepong was an ADBI research fellow and now assistant director at the Monetary Policy Group of the Bank of Thailand.

Know more about ADBI’s research on

Global Financial Crisis: http://bit.ly/2zpwYRR

Economic Integration: http://bit.ly/2AjebGY