For emerging markets in Asia, destabilizing capital flow risks remain a fact of life. As financial prospectuses emphasize, past performance does not guarantee future returns. Shifts in global risk aversion are likely to be a critical determinant of the size and scope of stop-go capital flows in Asian emerging markets and elsewhere. So far, risk aversion has remained high due in large part to the rolling international crises. But when the worst of the crisis risks abate, the big question is: what will be the implication?
For the global economy as a whole, a robust recovery would be a good development. However, for individual economies, the policy environment could become quite challenging. In the case of Asian emerging markets, the low policy rates and bloated central bank balance sheets are creating their own set of complications. And while there is renewed interest in capital controls and macro-prudential tools as substitutes for more traditional reliance on realignments of interest rates and exchange rates, the jury is still out on their lasting macroeconomic effectiveness.
So what are the lessons for CESEE economies? My reading of the situation suggests that there is no single silver bullet that will ensure noninflationary stable growth. No new tool is available to fundamentally change the calculus of the policy challenges. Yes, the experience of Asian emerging markets suggests that new tools can buy more time than we might have thought was possible a few years ago. But, capital flow volatility will continue to be a challenge for emerging-market economies. And, in the end, getting the policy mix right is the key to successful management of the risks. Central banks need to ensure price stability. Adopting new international regulatory reforms is necessary to enhance financial system resilience. Fiscal positions need to be sound and free from concerns of fiscal dominance. And, central banks and finance ministries should be wary of persistent one-sided exchange rate intervention. While these principles are certainly not new, they are tried, true, and form the strongest basis for future success.
BIS (2010), ‘The international financial crisis and policy challenges in Asia and the Pacific’, BIS Papers no. 52, July.
Chen, Q., A. Filardo, D. He and F. Zhu (2012), ‘International spillovers of central bank balance sheet policies’, BIS Papers no. 66, October.
Filardo, A. (2012), ‘Ensuring price stability in post-crisis Asia: lessons from the recovery’, BIS Working Paper no. 378, April.
Filardo, A. and S. Grenville (2012), ‘Central bank balance sheets and foreign exchange rate regimes: understanding the nexus in Asia’, BIS Papers no. 66, October.
Filardo, Andrew and James Yetman (2012), ‘Key facts on central bank balance sheets in Asia and the Pacific’, BIS Papers no. 66, October.