BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 5/2013:
Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia
Andrew J. Filardo ()
and Pierre L. Siklos ()
Abstract: This paper examines past evidence of prolonged periods of
reserve accumulation in Asian emerging market economies and the direct and
indirect implications for monetary stability through the potential impact
of such episodes on financial stability. The empirical research focuses on
identifying periods of prolonged interventions and correlations with key
macrofinancial aggregates. Related changes in central bank balance sheets
are also examined, especially in periods when the interventions are linked
to strong capital inflows. In particular, we consider whether changes in
the central bank's balance sheet from prolonged intervention lead to
spillovers to the balance sheet of the private sector. We explore the
possible forms of the spillovers and the consequences on asset prices
(e.g., housing prices, equity prices, the growth in domestic credit).
Policy implications are drawn. Finally, we propose a new indicator of
reserves adequacy and excessive foreign exchange reserves accumulation
based on a factor model. Two broad conclusions emerge from the stylized
facts and the econometric evidence. First, the best protection against
costly reserves accumulation is a more flexible exchange rate. Second, the
necessity to accumulate reserves as a bulwark against goods price inflation
is misplaced. Instead, there is a strong link between asset price movements
and the likelihood of accumulating foreign exchange reserves that are
costly.
Keywords: foreign exchange reserves accumulation; monetary and financial stability; (follow links to similar papers)
JEL-Codes: D52; E44; F32; F41; (follow links to similar papers)
39 pages, March 28, 2013
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