Much of the past literature on the use of monetary policy instruments by central banks in East Asia has focused on three main areas. These have been adjustments in commercial bank reserve requirements or liquidity ratios, central bank discount policy, and the use of various direct controls such as ceilings on the amount of commercial bank credit expansion. Less attention has been paid to central banks' use of money market instruments in the conduct of monetary policy. Yet, this is an important area, particularly since six of the eight major East Asian developing economies have utilized money market instruments of one type or another since the early 1980s in achieving their monetary policy objectives. This shift to greater use of money market instruments and, hence,open market operations, has been accompanied by the central banks' issuance of their own debt instruments.
This paper examines the six East Asian developing economies that have utilized money market instruments during the past decade as either a major monetary policy instrument or as a supplement to other instruments in the pursuit of monetary policy objectives. The six economies covered are the Philippines, Korea, Taiwan, Indonesia, Thailand and Hong Kong. Malaysia and Singapore are excluded as neither has made much, if any, use of money market instruments in their conduct of monetary policy.
The pricing of financial distress or default risk is one of the fundamental questions in financial economics. In a recent study, Vassalou and Xing (2004) measure default risk using a default likelihood indicator (DLI) computed according to the Black Scholes (1973) and Merton (1974) option pricing frame work and show that stocks more likely to default earn a higher return than otherwise similar stocks.
Their finding represents a puzzle for the literature on financial distress or default risk, as most recent research documents the opposite relation (see Dichev (1998), Griffi n and Lemmon (2002), Garlappi, Shu, and Yan (2007), Campbell, Hilscher, and Szilagyi (2007) and George and Hwang (2007)). We resolve this puzzle by relating Vassalou and Xingms finding to the short term return reversal first documented by Jegadeesh (1990) and Lehman (1990). In addition, we analyze a concrete channel through which a liquidity shock might occur on a stock which in turn causes the return reversal.
“The analysis of the paper has been conducted subject to many limiting assumptions, including a concern with real and not nominal magnitudes, absence of international capital mobility...the key distinction between the resource movement effect and the spending effect of the boom would remain important ingredients in a more complete analysis of the issues arising from the ‘Dutch disease’...We have also not touched on the issue of whether a deliberate policy of preventing a real appreciation... should be pursued.” W.M. Corden and J.P. Neary, Economic Journal (1982), p 841.
The documented experiences of the largest recipients of capital inflows in Asia and Latin America include high investment and consumption, gross domestic product (GDP) growth, increased current account deficits and real exchange rate appreciation. Capital inflows have therefore been both beneficial and problematic. Thus, despite their long-term benefits in increased efficiency in investment and associated technology transfers and economic growth, capital inflows raised serious concerns among policy makers because of their potential effects on macroeconomic stability, the competitiveness of the export sector and the external viability of the recipient countries. The most popular policy response to capital inflows in both Latin America and Asia was sterilization, with the aim to mitigate inflationary pressures and appreciation of the real exchange rate.
