About Pornpinun ChantapacdepongPornpinun Chantapacdepong is a research fellow at the Asian Development Bank Institute.
The ultra-low and negative interest rate environment in advanced economies and its implications for the rest of the world are currently among the top concerns of financial market participants and policy makers worldwide. Mark Carney, the governor of the Bank of England, recently said the low interest rate equilibrium is one of the challenges that the global economy risks becoming trapped in. The phenomenon started when the central banks of the eurozone, Switzerland, Sweden, and Denmark adopted negative interest rates from mid-2014 to early 2015. Japan followed in January 2016 and Hungary was the first emerging market to introduce negative rates in March 2016.
Earlier literature examined determinants of international capital flows especially during the period of high and persistent capital inflows to emerging economies during 2009–2013. The literature mainly identified the push and pull factors and explained how these factors affect the capital flows into emerging Asia “on average.” In other words, the literature calculated the effects of these factors “on the mean” of the distribution of capital flows.
Looking at the varying patterns of the capital flows into Asia in the last decade, the period after the taper tantrum on 21 May 2013 until 31 October 2015 is of particular interest from both global and local perspectives.
On August 2015, the People’s Bank of China devalued the yuan with the aim of appreciating the currency against the US dollar. On October 2015, the European Central Bank signaled the intention to pump more liquidity into the eurozone economy. On October 2015, the Federal Reserve postponed its intention to conduct tapering on its monetary policy. Over the last 24 months, the dollar has been up nearly 10% against a major currency index of its trading partners. Emerging market economies have been facing disappointing growth, more volatile foreign exchange rates, and low inflation due to the slowdown in economic activities and the sharp decline in commodity prices. Moreover, the growth of debt in emerging countries has increased dramatically compared to advanced economies. Since 2009, the average level of private credit as a proportion of gross domestic product (GDP) has increased from around 75% to 125%. These stylized facts highlight deep uncertainties and downside risks in Asia. Measures of regional financial integration, capital market deepening, and emerging market banking systems must be carefully evaluated.
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