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- 1. Post – crisis Monetary Response of Surge Capital Inflows: Policy Trilemma and Sterilization in EMEs Lecturer: Pham Khanh Duy Men Tao Group 1
- 2. MENTAO GROUP • Nguyen Thi Mai Anh • Nguyen Thi Thuy Trang • Truong Thi Y Nhi • Nguyen Hoang Mai Khue • Hoang Trang Bao Ngoc • Dang Van Han • Truong Hai Trieu • Nguyen Hien • Nguyen The Bao • Tran Lam Duy • Nguyen Nhu Hai Binh • Le Anh Tuan 2
- 3. SUMMARY I. Introduction II. Literature Review The trilemma issue and economic background Capital flows and sterilized interventions III. Model and Frameworks Reserve vs. Interest rate Exchange Rate vs. Money Supply Policy trilemma effect and utilization of sterilization IV. Concluding Remark MenTao group 3
- 4. INTRODUCTION This paper examines the post-crisis monetary responses of selected EMEs faced with huge capital inflows Exchange rate overshoot Financial instability Trilemma: bộ ba bất khả thi Negative effect HOW TO CIRCUMVENT THESE NEGATIVE EFFECTS? Inflation Economic dowturn … … Sterilized intervention
- 5. INTRODUCTION Trilemma policy : MenTao group 5 Free capital inflow Fixed exchange rate Sovereign monetary policy Two out of three goals can be achieved at a time
- 6. INTRODUCTION • Six selected emerging market economies (EMEs) : Avandced Secondary - Malaysia - China - Thailand - Indonesia - Turkey - India Financial system had dealt with policy trilemma 6
- 7. INTRODUCTION Capital flows movements in emerging &developing economies, 1997 – 2012 (USD billions) Source: IMF, WEO April 2012 database, http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx
- 8. Literature review • The trilemma issue and economic background of EMEs Indonesia After crisis 1997/98, shifted from managed ER to a floating ER regime and achieved an independent monetary policy. Thailand Shifted to floating exchange rates, decreased their interest rate, and thereby retained monetary autonomy Malaysia 1998, Malaysian government imposed capital controls and pegged its exchange rate 2009, the Malaysian economy experienced similar external shocks , but weathered the storm because of large internal reserves China, India Pursue managed exchange rates back up by large international reserves, some degree of monetary autonomy and restrained financial integration
- 9. Literature review There was a trade off among three trilemma variables that happened between developing and industrialized countries Before 1990 Maintaining exchange rate stability 2000 Developing countries focussed on managing their ER and retaining an independent MP Industrialized economies Reduced their MP autonomy and increase their reliance on ERS
- 10. Literature review 2. Capital inflows and sterilized interventions Capital inflows to Asia increased substantially five years after crisis 2007/08 The net private capital flows : - rise to USD825 billion by the end of 2010 - Increase of about 42% compared to 2009 - Slow-down on the end of 2012 - Flood again in the next few years Large-scale global liquidity, low interest rate, lower risk aversion 10
- 11. Literature review MenTao group 11 2. Capital inflows and sterilized interventions Surges in capital inflows: Positive side Financial investment Diversify risk Expand the economy activity Negative side Quickly reverse Causing instability Inflation EMEs should cooperate to manage this risk
- 12. Literature review 12 Sterilization after crisis Degree of sterilization Remark Malaysia More Full Maintain high levels and did oversterilize it for the post crisis Philipine Less Partial Less sterilization after post crisis Indonesia More Partial Indonesia has tended to sterilize more after Asian crisis Thailand Less Partial Thailand sterilized less following the Asian crisis China Less Partial China only sterilized a little after the crisis India More Partial Like Indonesia, India had sterilized more after the Asian crisis Sterilization of full/partial reserve effect of capital inflows in Asia, 1990 – 2007 Source: Adopted from Cavoli and Rajan (2009)
- 14. Model and Frameworks Reserve vs. Interest rate (Edward & Khan (1985)) Sterilization is an appropriate policy for EMEs?? - Sterilization may keep interest rates high and thus prolong MenTao group 14 the capital inflow This model determines the relationship between capital mobility and sterilization - Sterilization policy may only impact domestic interest rates during “imperfect capital mobility”
- 15. Model and Frameworks MenTao group 15 Exchange Rate vs. Money Supply Sterilizing the money supply is an effective policy response to overcome high inflation during foreign capital inflow surges into the regions - This policy works well in a managed floating regime in which sterilization may keep the money supply at equilibrium and keep pushing the value of the currency to appreciate
- 16. Summary of policy trilemma effect and utilization of sterilization Interest rate Capital flow ER regime Reserve Sterilization Malaysia Non-independent MP Free Managed float 4th Large Full Thailand Independent MP Free Freely float 3rd Large Partial Turkey Independent MP Controlled Freely float 5th Large Nil Indonesia Independent MP Free Freely float 6th Large Partial China Independent MP Controlled Managed float 1st Large Less India Independent MP Controlled Managed float 2nd Large Less 16
- 17. Add your company slogan www.themegallery.com LOGO Concluding Remark China, India dealing with classic policy trilemma sterilize less of their reserves -> holding high foreign reserves Run monetary policy autonomy freely set interest rates maintain stability ER via managed ER regime impose restrictions on capital flows Malaysia, Indonesia, Thailand, Turkey learn
- 18. Concluding Remark Fully exploiting the classic policy trilemma with the help of sterilization and slowly adapting the new policy trilemma have positive implications when facing surges and volatile capital flows in the future. MenTao group 18
- 19. Thanks for listening MenTao group Question and answer