We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the VIX.

This study analyzes the magnitude of the US monetary policy spillover on the Indonesian local currency government bond yield, particularly when the Federal Reserve (Fed) implemented the quantitative easing (QE), tapering off, Fed fund rate (FFR) normalization, and quantitative tightening over the past decades.

Using a time-varying parameter SVAR model over the period 1994 to 2021, this paper provides estimates of exchange rate pass-through (ERPT) to both producer and consumer prices for nine emerging Asian economies.

Low inflation hit the Japanese economy shortly after the burst of the bubble in stocks and real estate in 1991 and has haunted the domestic economy ever since. The bubbles were partly attributable to prolonged monetary easing in the second half of 1980s, which was conducted to increase domestic demand and mitigate the recession induced by the appreciation of the Japanese yen.

Financial technology (fintech) development has spread rapidly around the world, especially in the last few years, amid new regulatory policies and the now-waning coronavirus disease (COVID-19) pandemic. This is lowering transaction costs, boosting the variety of financial services, and expanding access and financial inclusion in markets.

Fintech - the application of digital technology to financial services - is reshaping the future of finance. Digital technologies are revolutionizing payments, lending, investment, insurance, and other financial products and services - and the COVID-19 pandemic has accelerated this process.

As digital transformation accelerates globally, new innovative technology solutions to enhance financial inclusion are being developed more rapidly than ever. The development of cryptocurrency markets, and their growing popularity among consumers, has generated significant interest among governments globally in exploring the prospect of central bank-issued digital currencies - as a mechanism that could leverage digital finance technologies and as infrastructure to enhance the reach and value of formal financial products and services among the unbanked or underserved.

This paper explores why some episodes of US yield increases result in investor retrenchment from emerging markets and others do not. To answer this, the paper identifies episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with negative outcomes in emerging markets.

What is the effect of Central Bank Digital Currency (CBDC) on financial stability? This paper answers this question by studying a model of financial intermediation with an endogenously determined probability of a bank run and a remunerated CBDC that provides consumers with an alternative to bank deposits.

Emerging Markets (EM) capital flows are volatile, procyclical, risk sensitive, tail-dependent, and have asymmetric outcomes with changing global financial conditions. The evolving nature of capital flows, notably with a shift towards market-based financing intermediated by the non-bank financial sector since the Great Financial Crisis (GFC) of 2008-09, has contributed significantly to the tail-dependence and risk-sensitivity of such flows.

The world faces a dual environmental crisis through climate change and biodiversity loss. State-owned enterprises (SOEs) are in a unique position to take a leading role in confronting these challenges and shifting economic activity from polluting to green. This requires a shift in existing business models, particularly in the energy, finance, transport, and water sectors, which in Asia are traditionally dominated by SOEs.

Individuals have concerns about sharing data, but without access to personal information data-intensive fintechs cannot prosper, nor consumers benefit from their services. Well-designed privacy protection regulation needs to address this conflict. This paper studies how the California Consumer Privacy Act (CCPA), a 2020 privacy law that grants users control over data and mitigates concerns over sharing them, affects bank and fintech lending in the mortgage market.

A sustainable financing strategy for SMEs should aim to enhance a low-cost collateral-free supply of loans to SMEs with good track records of repayments to banks. This paper suggests two alternative financing mechanisms to overcome certain borrowing constraints of SMEs.

Big Data analytics play an important role in today’s digital era, including the support of the formulation of both monetary and macroprudential central bank policies. In addition, the central bank also utilises Big Data for the supervision and regulation of the financial system, such as the application of supervisory technology (SupTech) and regulatory technology (RegTech).

Using panel data of cities in the People’s Republic of China from 2011 to 2019, this paper analyzes the impact of digital finance on low-carbon transition derived from a super-efficiency slacks-based measure data envelopment analysis.

Discussions on Central Bank Digital Currencies (CBDCs) have so far mostly focused on the potential risks that these currencies could represent for financial intermediation and financial stability. It is important, however, to also consider how they could contribute to the welfare of citizens, and how they can be leveraged to help uphold certain democratic values. This paper explores how the design and implementation of CBDCs can help countries mitigate threats to individual liberties and human rights, as well as promote the equitable treatment of citizens, the protection of privacy, and citizens’ trust in central banks. The sound governance architecture of CBDC systems at the national and international level can further support these objectives.

This report explores issues, opportunities and challenges for financial consumers in relation to sustainable finance. It examines current trends in terms of consumer demand for and experience with sustainable finance products, as well as new risks to consumers posed by sustainable finance products. This report also explores financial consumer protection tools and responses available to policy makers and oversight authorities, illustrated by selected examples of how these tools and responses are being deployed around the world. Finally, this report offers a number of policy considerations to help guide policy makers and oversight authorities responsible for financial consumer protection.

Environmental, social, and governance (ESG) investment is rapidly developing and expanding from developed to developing countries. Large companies and financial institutions are increasingly embracing ESG investment to reduce greenhouse gas (GHG) emissions, facilitated by advancements in digital technology.

Motivated by the 2022 uptick in headline inflation and the marked shift towards more restrictive monetary policies globally, this paper examines the sacrifice ratio, i.e., the percentage cost of actual production lost to every one percentage point decrease in (trend) inflation, for selected Southeast Asian economies. Results indicate that upon adopting a contractive monetary policy, GDP growth dropped by up to 0.5%, confirming that monetary authorities’ disinflationary policies typically trigger declines in both output and employment. However, as even minor adjustments to the way of determining the sacrifice ratio lead to varying results, caution ought to be applied when deriving potential (monetary) policy recommendations.

This study investigates how development of the local currency (LCY) bond market brings stability in the financial market. The analysis is based on annual economy panel data set for 1989-2020.

Data sharing arrangements are evolving from Open Banking to Open Finance. This next stage of the evolution builds upon existing frameworks to expand data access and data source sharing beyond payment/transaction data, while also including other areas of financial activity (e.g. insurance). This paper analyses the different types of data sharing frameworks currently available in OECD and non-OECD member countries. It examines the specific rules and conditions of such frameworks around data access and sharing, consumer safeguards, and operational and technical specifications. It also discusses learnings from existing frameworks on the impact that such arrangements have had on customers and financial markets.

Regional integration in Asia and the Pacific is progressing steadily. Regional integration, as measured by the Asia-Pacific Regional Cooperation and Integration Index, has progressed steadily over the past 15 years and remained stable in 2020 despite the pandemic.

We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centres - the United Kingdom, Hong Kong, China, and Ireland - we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-centre affiliates.

This paper investigates whether the uncovered interest parity (UIP) will hold more firmly if the local currency bond markets (LCBMs) are more developed, and the presence of nonbank financial institutions (NBFIs) is expanded.

This paper studies the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment.

This paper analyses the links between advances in financial technology, investors’ sophistication, and the composition and returns of their financial portfolios. It develops a simple portfolio choice model under asymmetric information and derive some theoretical predictions.

This chapter discusses the structure and functioning of the spot foreign exchange (FX) market. The market structure, which has become far more complex over the past three decades, has mostly evolved endogenously as the global FX market is subject to notably less regulatory oversight than equity and bond markets in most countries.

This paper studies the relationship between international bond flows and exchange rate returns for a panel of emerging market economies (EMEs). Specifically, it investigates whether international net bond flows are correlated with subsequent changes in the value of the local currency against the US dollar.

Exchange rate movements affect the economy through changes in net exports, i.e. the trade channel, and through valuation changes in assets and liabilities denominated in foreign currencies, i.e. the financial channel. This paper investigates the macroeconomic and financial effects of U.S. dollar (USD) exchange rate fluctuations in small open economies.

Sustainable finance, including the increasing array of related financial products, is attracting the attention of investors, policy makers, and civil society stakeholders because of its potential to deliver long-term enterprise value that aligns with societal values and contributes to sustainability and climate-related objectives.

Using high-frequency, proprietary data on daily net non-resident portfolio flows to emerging markets, the study finds in the time domain connectedness framework that, to varying degrees, there is less interconnectedness in non-resident debt and equity portfolio flows to our sample of emerging market (EM) economies during normal times.

This paper finds that deep contractions have highly persistent scarring effects, depressing the level of GDP at least a decade hence. Drawing on a panel of 24 advanced and emerging economies from 1970 to the present, it shows that these effects are nonlinear and asymmetric: there is no such persistence following less severe contractions or large expansions.

Recent years have witnessed a surge. in sustainable bond markets, not only in terms of financing amounts but also in the form of innovative instruments. The expanding sustainable bond family now includes green bonds, social bonds, sustainability bonds, sustainability-linked bonds, and transition bonds

This paper examines real and financial spillovers to safe haven financial flow destinations due to risk-off shocks in global financial markets. Using country-specific structural vector autoregression (VAR) models over the period 1990 to 2021, it shows that dynamics for Japan appear to be different to those of Switzerland and the US in four main ways.

Banks of different sizes respond differently to interest on reserves (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-through of IOR rate changes to deposit rates. In these circumstances, a central bank digital currency (CBDC) may be used to provide competitive pressure to drive up deposit rates and improve monetary policy transmission.

Climate change mitigation and adaptation efforts are urgently needed across Southeast Asia. The financial sector can play a critical role in supporting countries in their journey toward greater resilience and sustainability, but it must adapt to do so effectively. This report shows that while sustainable finance has experienced widespread expansion, sustainable financial markets remain small and unable to meet the funding needs of ASEAN-5 economies for their various sustainability objectives.

Using a unique dataset of around half a million Chinese firms that use a QR code-based mobile payment system, this paper finds that (i) the creation of a digital payment footprint allows firms to access credit provided by the same big tech company; (ii) transaction data generated via QR code generate spillover effects on access to bank credit; and (iii) there are positive effects of access to big tech credit on sales, including during the Covid-19 shock. The findings suggest that access to innovative payment methods helps micro firms build up credit history, and that using big tech credit can ease access to bank credit.

This paper provides new evidence on the spillover effects from US interest rate changes, focusing on factors that are pertinent to the current conjuncture: weak recovery prospects in emerging market and developing economies (EMDEs), and the confluence of macroeconomic shocks shaping the path of interest rates in the US.

A core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the magnitude of regulatory spillovers and the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation.

Digital financial services focused on innovative financial technologies (fintech) can benefit individuals, businesses, and governments. An appropriate policy and enabling regulatory environment for developing responsible and inclusive digital financial services can help expand inclusive economic growth and address the Sustainable Development Goals (SDGs).

This paper identifies the effect of climate change-related regulatory risks on credit reallocation. The evidence suggests that effects depend borrower’s region. Following an increase in salience of regulatory risks, banks reallocate credit to US firms that could be negatively impacted by regulatory interventions.

This report provides an assessment of the stability of the financial systems of selected Pacific Island Countries (PICs) in the context of COVID-19 and emerging risks. The report brings together an analysis of information provided by the central banks of the PICs covered by this study over the last two years.

A fundamental shift in the way capital is being allocated within global markets is currently taking place. The triple threats of climate change, environmental degradation, and social inequalities - together with the impacts of the coronavirus disease (COVID-19) - highlight the need for new financing mechanisms to ensure a sustainable future. The awareness of these threats by the financial sector has led to the development of a sustainable finance market to directly address these challenges at scale.

The primary objective of this report is to ascertain the most recent status of technology adoption by Cross-Border Settlement Infrastructure Forum (CSIF) member organizations - including central securities depositories (CSDs) and central banks in the Association of Southeast Asian Nations (ASEAN) plus the People’s Republic of China (PRC), Japan, and the Republic of Korea (collectively known as ASEAN+3) region - and to share that information with CSIF members, thereby promoting technical advancement in the region’s market infrastructure system.

This paper studies the dynamics of contagion across the banking, insurance and shadow banking sectors of 16 advanced economies in the period 2006-2018. It constructs Granger causality-in-risk networks and introduce higher-order aggregate networks and temporal node centralities in an economic setting to capture non-Markovian network features.

This paper studies the long-run evolution of bank risk and its links to the macroeconomy. Using data for 17 advanced economies, this paper shows that the riskiness of bank assets declined materially between 1870 and 2016. But even though bank assets have become safer, the losses on these assets are associated with increasingly large output gaps.

This paper lays out a small open economy model incorporating key features of EME economic and financial structure: high exchange rate pass-through to import prices, low passthrough to export prices and shallow domestic financial markets giving rise to occasionally binding leverage constraints.

Financial centres that cater predominantly to non-residents – which is referred to as cross-border financial centres (XFCs) – are important intermediaries of cross-border financial flows. For analysing capital flows and international interconnectedness, it can be useful to distinguish countries that are home to XFCs from other countries.

Set against the context of a growing financial technology (fintech) sector in Asia, this book provides insights on fintech’s impacts on economic recovery during the coronavirus disease (COVID-19) pandemic. Helped by the region’s smooth adoption of digitalization, notably in the area of digital payments, the backdrop for the continued development of fintech firms in Asia was already favorable.

This paper lays out a model of risk capacity for global portfolio investors in which swings in exchange rates can affect their risk-taking capacity in a Value-at-Risk framework. Exchange rate auctuations induce shifts in portfolio holdings of global investors, even in the absence of currency mismatches on the part of the borrowers.

Does foreign capital improve the quality of domestic institutions? Consistent with an institutional quality channel of capital flows, this paper shows that industries that are more dependent on “good” institutions to operate grow more than others after foreign capital flows into the private sector.

This report was prepared as part of the Asian Development Bank’s Strengthening Micro, Small, and Medium Enterprises Finance Project, which aims to evaluate the access to finance of micro, small, and medium enterprises (MSMEs) in Kazakhstan and identify constraints to and demand for financing.

Small and medium enterprises (SMEs) represent the economic backbone of most developed and emerging countries. Globally, SMEs account for more than 90 percent of all businesses and more than 50 percent of employment. SMEs are also significant contributors of economic activity, representing on average 60 to 70 percent of the GDP of most countries worldwide.

This note examines the implications of digital innovation for market structure and attendant policies, including financial and competition regulation. There have been several surveys of regulatory responses. This note takes a step back, to look at what the economic theory of banking and financial intermediation can tell us about how technology may drive industrial organization in the sector, and how that might inform further policy responses.

Should a central bank deviate from price stability to promote financial stability? This paper studies this question through the lens of a textbook New Keynesian model augmented with capital accumulation and search-for-yield behaviors that give rise to endogenous financial crises.

Focusing on Asian economies over the period 2006 to 2019, this paper finds that while nonbank finance appears to complement rather than substitute credit provision by the traditional banking sector, weaker regulatory quality is an important driving factor.

Fintech is transforming the global financial landscape. It is creating new opportunities to advance financial inclusion and development in Emerging Markets and Developing Economies (EMDEs), but also presents risks that require updated supervision policy frameworks. Fintech encompasses new financial digital products and services enabled by new technologies and policies.

Open banking has emerged strongly in the past few years as a system to give customers the right to share with parties they trust the information that banks have about them in a secure manner and also as a way to open up processes and services in banking. The main objectives pursued by regulatory frameworks that define open banking are generally encouraging innovation and fostering competition, resulting in new products and services at competitive prices to the benefit of consumers.

Asia and the Pacific saw fragile, uneven recovery in cross-border economic activities and movement of people in 2021, and the recovery momentum has weakened due to the Omicron variant. Merchandise trade, cross-border investment, capital flows, and international remittances have improved markedly since the latter half of 2020.

Recent research developed under the ECB research task force on Monetary Policy, Macroprudential Policy and Financial Stability highlights the existence of trade-offs and spillovers that monetary policy and macroprudential authorities face when deciding on their policy interventions.

This paper studies the distribution of credit during crisis times and its impact on firm indebtedness and macroeconomic risk. Whereas policies can help firms in need of financing, they can lead to adverse selection from riskier firms and higher default risk. The paper analyzes a large-scale program of public credit guarantees in Chile during the COVID-19 pandemic using unique transaction-level data on the demand and supply of credit, matched with administrative tax data, for the universe of banks and firms.

This paper shows that FinTech lending affects credit markets and real economic activity using a unique data set of a Peer-to-Business platform for which we have the universe of loan applications. It finds that FinTech serves high quality and creditworthy small businesses who already have access to bank credit.

Amid the ongoing coronavirus disease (COVID-19) pandemic, risks from the Russian invasion of Ukraine, rising inflation, and tighter financial conditions are raising economic uncertainty while global growth and trade have yet to recover to pre-pandemic levels.

How do real interest rates affect financial fragility? This paper studies this issue in a model in which bank borrowing is subject to rollover risk. A bank’s optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank creditors.

In recent years, environmental, social and governance (ESG) investing has evolved to become a leading approach for investors seeking to pursue forms of sustainable finance. This report takes stock of the major trends and current state of the ESG and climate-aligned investing in Asia and provides policy considerations to strengthen ESG investing and to help finance the climate transition.

Over the past 50 years, the financial sector has become one of the most digitalized, globalized, and regulated sectors of the global economy. Since the late 1960s, with the advent of the first ATM and the handheld calculator, finance has rapidly digitized and globalized in developed markets and most recently in emerging markets and developing countries.

Overlapping portfolios constitute a well-recognised source of risk, providing a channel for financial contagion induced by the market price impact of asset deleveraging. This paper introduces a novel method to assess the market price impact on a security-by-security basis from historical daily traded volumes and price returns.

Disasters brought about by natural hazard events and extreme weather conditions affect men and women differently. Differences in socioeconomic status, ability to access resources, and prevailing social and cultural norms between men and women impact the way they respond to and are affected by disasters. Given the low rate of women’s participation in the labor force and that women are mostly self-employed in the informal economy, they are more likely than men to live in the poorest households.

Over the past two years, the World Bank has been working with Pacific Island Countries (PICs) to assess the impact of the COVID 19 pandemic on their financial systems and provide guidance to the PIC prudential authorities on policy issues relating to strengthening the resilience of financial systems in the region.

Regional cooperation and integration is a multifaceted and multidimensional process in which neighboring economies expand linkages and coordinate policies to attain common objectives. Progress in this regard has been pivotal in Asia and the Pacific to improving economic growth and social inclusion, and for reducing poverty and enhancing financial and institutional stability. Initiatives have therefore emerged to capture the increasingly complex dimensions of regional cooperation and integration, including in areas such as digitalization, health security, and environmental policy.

The Regional Comprehensive Economic Partnership (RCEP) presents strong potential to mold regional trade and investment patterns well into the future and to influence the direction of global economic cooperation at a challenging time. This paper evaluates the RCEP and estimates its potential effects on income, trade, economic structure, factor returns, and employment using a computable general equilibrium mode.

In recent years, many governments, international organisations and private institutions have endeavoured to analyse climate transition-related risks and opportunities with respect to the transition to low-carbon economies, including implications for the global financial system. An orderly low-carbon transition through financial systems would require that financial markets efficiently allocate capital, assess and transfer risks, and facilitate price discovery.

Over the years, the demand for seamless and inexpensive cross-border payments has grown in parallel with growth in international e-commerce, remittances and tourism. Yet, cross-border payments have not kept pace with the intensive modernization that has characterized domestic payment services worldwide. Cross-border payments continue to be largely based on the old correspondent banking model, which has not quite benefited from the same flow of innovations as domestic payments have over the recent decades.

In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs). A growing body of economic research informs these activities, often focusing on the “reserves for all” aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy.

Money performs three functions: medium of exchange (facilitates exchange between two parties), store of value (stores value from one period to another), and unit of account (acts as numeraire of value). There are a number of different types of money that perform these functions.

This paper develops early warning models for financial crisis prediction by applying machine learning techniques to macrofinancial data for 17 countries over 1870-2016. Most nonlinear machine learning models outperform logistic regression in out-of-sample predictions and forecasting.

This paper proposes a novel theory of reserve accumulation that emphasizes the role of an independent central bank.

For decades, international trade has played a vital role in driving unprecedented economic growth in many emerging countries. Such an outcome could have been even more promising and inclusive if all viable trade activities were realized, but some are constrained due to adequate financing, particularly those from smaller businesses.

This paper quantifies spillbacks from US monetary policy based on structural scenario analysis and minimum relative entropy methods applied in a Bayesian proxy structural vector-autoregressive model estimated on data for the time period from 1990 to 2019. It finds that spillbacks account for a non-trivial share of the overall slowdown in domestic real activity in response to a contractionary US monetary policy shock.

Cross-border capital flows are expected to lead to increased international risk sharing by facilitating borrowing and lending in global financial markets. This paper examines risk-sharing outcomes of various types of capital flows (foreign direct investment, portfolio equity, debt, remittance, and aid flows) in a large sample of emerging market and developing economies.

This paper examines real and financial spillovers from monetary policy shocks originating in the US and the People’s Republic of China (PRC) to advanced and emerging economies in Asia over the period 2000 to 2020. Using a structural panel vector autoregression approach, Asian economies overall are more susceptible to spillovers to GDP, inflation, and the current account emanating from monetary policy shocks in the PRC than to those from the US.

This paper explores and summarizes the evolution in bank capital regulations and bank risk after the global financial crisis. Using a new survey of bank regulation and supervision covering more than 120 economies, it shows that regulatory capital increased, but some elements of capital regulations became laxer. Analyzing bank level data, it also documents the importance of defining bank regulatory capital narrowly as the quality of capital matters in reducing bank risk. This is particularly true for banks that have more discretion in the computation of regulatory capital ratios and are subject to weaker market monitoring.

Cross-border bank credit is dominated by a small number of very large links between banks in one country and borrowers in another. Most of these large cross-border banking links are mainly between major advanced economies. However, some of these advanced economies, whose financial sector ownership is more concentrated, engage in greater cross-border lending especially to borrowers in countries whose banking systems are less concentrated.

The ongoing coronavirus disease (COVID-19) pandemic has prompted a reversal of hard-won development gains for the region and across the globe. At the same time, as governments take measures to keep the spread of the virus in check, the strain on the world’s economies is considerable. The pandemic moreover threatens to further entrench existing financial vulnerabilities in Asia, including credit constraints, a lack of financial inclusion, and substantial investment financing gaps, among others.

The last fifteen years have witnessed remarkable interventions of governments in financial markets. Central banks have purchased securities at unprecedented levels via quantitative easing and foreign exchange intervention. These interventions have constituted the core policy response to crises such as the global financial crisis of 2008-09, the European sovereign debt crisis of 2011-12, and the ongoing Covid-19 pandemic.

Since the global financial crises, many countries have implemented macroprudential policies with the aim to render the financial system more resilient to shocks and limit the procyclicality of the financial system. This paper presents theoretical and empirical evidence on the effectiveness of macroprudential policy, on both, financial stability and economic growth focusing on capital measures and borrower-based measures.

Governments are often the largest users of a country’s payment systems. They frequently make payments to and receive payments from individuals and businesses. There is considerable variation in these payments across counterparty actors, use cases, and payment mechanisms.

The effect of US monetary policy on EMEs is one of the fiercely debated issues in international finance. This paper contributes to this debate using micro- and macro-level analyses from India over the period 2004-2019.

An all-inclusive financial system is one of the channels through which information and communication technology (ICT) affects economic growth. Digital financial inclusion is an evolving phenomenon that enhances the ease of access to and availability of formal financial services.

In this current era of the fourth industrial revolution, both the negative and positive effects of financial inclusion raise the question of whether digital finance can be a solution for financial stability through attaining sustainable economic growth or not.

More than 20 years after the Asian financial crisis, the region’s continued high reliance on United States (US) dollar-denominated funding has significant implications for the transmission of global financial conditions to domestic financial and macroeconomic circumstances. Given limited domestic capital market-based financing solutions, a high reliance on funding denominated in US dollars renders countries vulnerable to changing global financial and liquidity conditions.

Financial capability is the capacity to act in one’s financial interest, given socioeconomic and environmental conditions. Financially capable individuals who make good financial decisions and interact effectively with financial service providers (FSPs) are more likely to achieve their financial goals and therefore improve their households’ welfare. The expectation is that financial education programs, when effectively designed and delivered, can be implemented as tools to increase consumers’ financial capability.

CBDCs should let central banks provide a universal means of payment for the digital era. At the same time, such currencies must safeguard consumer privacy and maintain the two-tier financial system. We set out the economic and operational requirements for a “minimally invasive” design - one that preserves the private sector’s primary role in retail payments and financial intermediation - for CBDCs and discuss the implications for the underlying technology.

New financial technologies - including those underpinning cryptocurrencies - herald broader access to the financial system, quicker and more easily verifiable settlement of transactions and payments, and lower transaction costs. Domestic and cross-border payment systems are on the threshold of transformation, with significant gains in speed and lowering of transaction costs on the horizon.

This paper studies the dynamic properties of sovereign bonds in emerging market economies and their associated risk premiums. It focuses on the properties of credit spreads, exchange rates, and their interaction. Relying on the term structure of local currency bonds issued by Asia-Pacific sovereigns, it finds that local variables are significant in the dynamics of currency and credit risk, and the components of bond risk premiums reflecting these risks. Local currency bonds dramatically improve the investment frontier.

The coronavirus disease (COVID-19) pandemic has weighed heavily on health and economic systems worldwide; it severely disrupted Asia’s cross-border trade and economic activities, and exposed vulnerabilities of global supply chains. a Yet, Asia immensely benefited from open trade and investment, with the region’s export-driven growth strategy and attractiveness to foreign direct investment (FDI) lifting millions out of poverty over half a century.

This paper analyses how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board’s monitoring exercise over the period 2002-17, this paper studies the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI).

Firms from emerging economies increased their bond financing significantly after the 2008-09 global financial crisis. The patterns of corporate borrowing in East Asia and Latin America offer very different lessons. In East Asia, the main component behind the overall growth in bond financing was an expansion in domestic bond issuances, in domestic currency, by more and smaller firms.

Asian financial systems have achieved significant development and integration over the past decades. From mostly state-funded and bank-dominated during the period of industrialization in the 1970s and 1980s, the region’s financial systems have become more diversified and market-based. While most Asian financial systems remain bank-dominated, the scope of financial products and services has broadened and new corporate financing sources are proliferating.

If well-designed and implemented, central bank digital currencies (CBDCs) likely offer the best solution to the financial inclusion and remittance problems that bedevil the Pacific region. However, the CBDC is a complex piece of software and a complex digital framework capable of generating economy-wide benefits and shocks. The development of a safe, efficient, and accessible CBDC by any Pacific country will require considerable expertise and a deep understanding of the design issues this fundamentally new form of currency gives rise to in this context.

This paper uses a unique survey data set of 105 central banks to investigate whether investment policies for central bank foreign reserve portfolios are linked to the governance arrangements for reserve management. The paper evaluates whether a central bank’s investment decision-making structure impacts how much risk institutions take in their reserve management operations and the level of diversity in their reserve portfolios.

This paper discusses the business correspondent (BC)-agent banking model in India against the backdrop of community-based rural livelihood programs, its relevance in facilitating financial inclusion in underserved rural geographies, and its potential to address the gender gap in financial inclusion.

Using a model of strategic interactions between two countries, this paper investigates the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When global lending conditions are determined non-cooperatively, this paper shows that coordinating regulatory policies leads to a Pareto improvement relative to the case of no cooperation.

This paper investigates the impacts of the COVID-19 pandemic and the large-scale social distancing (PSBB) policy on Indonesia’s financial technology (fintech) markets. It also elaborates the roles that fintech companies can play in the national economic recovery.

Fintech is increasingly recognized as a key enabler for financial sectors worldwide, enabling more efficient and competitive financial markets while expanding access to finance for traditionally underserved consumers.

This paper examines the role of local currency bond markets (LCBMs) and foreign investor participation in these markets in capital flow volatility in emerging Asian economies over the period 1999 to 2020.

This paper analyzes the main trends and patterns of nominal lending interest rates and lending-deposit interest rate spreads in emerging markets and developing economies. Using data from 140 emerging markets and developing economies, analysis shows that nominal lending rates and spreads declined between 2003 and 2017, with regional heterogeneity.

Cross-border banking in emerging markets and developing economies has expanded across most World Bank regions and has become large relative to some home and host economies. This paper analyzes recent trends of bank activities of financial groups headquartered in 46 emerging markets and developing economies, as well as the ownership structure of 51 prominent financial groups from emerging markets and developing economies.

This paper studies the effects of sterilized foreign exchange market intervention in a model with financial frictions and imperfect capital mobility. The central bank operates a managed float regime and issues sterilization bonds that are imperfect substitutes (as a result of economies of scope) to investment loans in bank portfolios.

This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies, using quarterly data for 1998-2017.

The BSP’s regulatory framework is broadly effective for the size and complexity of the Philippine banking system, but legislative gaps continue to hinder effective supervision of banks. The BSP has a well-resourced, experienced and highly committed staffing complement, but there is an ongoing need to develop and maintain adequate expertise in certain complex areas (e.g. risk modelling).

This paper proposes a method for computing the distribution of the potential fiscal cost of a banking crisis - a key input in assessing the adequacy of a country’s fiscal buffers.

This paper explores the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs).

This study examines how public and private debt buildup is related to currency depreciation pressure. The empirical analysis of a panel dataset of 59 advanced and emerging markets reveals that both private and public debt exacerbate currency vulnerability.

Global financial integration has deepened Asia’s global market connections over the past 2 decades. The benefits of greater financial integration include increased and more sophisticated sources of funding, more efficient capital allocation, better governance, higher investment and growth, and risk-sharing.

This paper explores the rationale for a green recovery being at the heart of post-COVID-19 economic planning. A number of countries have already embarked on creating green recovery strategies, while green programs that had been in place pre-COVID-19 also provide a base to build upon, in other countries.

Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. This paper fills this gap by developing a two-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks.

This paper presents new evidence on international financial market integration using stock analyst earnings forecasts from 37 countries. By examining cash flow and discount rate news co-movements, it finds that the financial and economic aspects of global market integration have diverged over time as financial integration has developed particularly more rapidly than economic integration over the past decade.

This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 advanced and developing countries. Using annual data over the 2004-2020 period, this paper finds that infectious-disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, the granular analysis using high-frequency (daily) data indicates that the COVID-19 pandemic has had a significant impact on market-implied sovereign default risk.

This paper is based on a study that examines the impact of the Covid-19 pandemic on Indonesia’s financial markets and monetary policy dynamics.

This study employs VAR-MGARCH model to investigate the spillover across the sovereign bond markets between the US and ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand) economies. The empirical results confirm the return spillover from the US to ASEAN-4, while the bidirectional influence in volatility exists between the US and ASEAN-4.

Banking flows to emerging market economies (EMEs) are a potential source of vulnerability capable of generating boom-bust cycles. The causal effect of such in flows on EME macro-financial conditions is hard to pin down empirically and should be key to well-informed policy design.

Financial technology (Fintech) has prompted authorities to consider their potential financial stability benefits, risks, and effective regulation. Recent developments suggest that regulatory approaches and their legal foundations need to augment entity-based regulation with increasing focus on activities and risks as market structure changes. This paper draws on recent international experiences in modernizing legal and regulatory frameworks for payment services.

This SEACEN research topic was awarded to Bank Indonesia in 2019 to investigate the development and prospects of new forms of financial intermediation in four Southeast Asian (ASEAN) countries, namely Indonesia, Malaysia, Thailand and Singapore, as well as to analyse their implications for monetary policy.

Globally, 1.7 billion adults still lack access to formal financial services, with a large percentage living in South Asia and Sub-Saharan Africa. Current financial inclusion strategies provide these vulnerable populations with access to a wide array of financial services that aim to build more inclusive and financially resilient societies. With the movement towards Fintech and over 67% of the world’s population having a mobile phone, digital financial literacy is gaining momentum.

To explore the determinants of peer-to-peer (P2P) lending expansion, this study examines factors that impact P2P lending using a sample of 62 economies over the period 2015-2017. It investigates the effects of financial development and financial literacy on the expansion of P2P lending.

Rapid developments in financial technology (fintech) are expected to contribute to improvements in financial inclusion and well-being. This paper investigates how financial literacy and other factors contributed to the adoption of fintech services in Japan, using data from a survey conducted by the Bank of Japan, including 25,000 individuals aged from 18 to 79.

Financial services in Thailand are undergoing rapid transformation. The adoption of digital payments has been growing at an exponential rate, thanks to various collaborative initiatives between the public and private sectors, as well as competition between financial services providers themselves.

This paper examines global credit intermediation through the lens of financial markets and financial intermediaries in the post-crisis period during which highly accommodative monetary policies contributed to investors’ search for yield. It reviews the extent to which non-bank intermediation contributed to the rise of sovereign and corporate debt levels and exuberance in global credit markets.

This paper presents the findings of a survey among 18 central banks from Asia and the Pacific regarding their views on and policies regarding sustainable finance. It also reviews recent developments in selected Asia and Pacific countries concerning sustainable finance to illustrate the actions that monetary and financial authorities have already taken to address climate and environmental risks, and to scale up sustainable finance.

Countries in the MENAP and CCA regions have the lowest levels of financial inclusion of small and medium enterprises (SMEs) in the world. The paper provides empirical evidence on the drivers of SME access to finance for a large sample of countries, and identifies key policy priorities for these two regions: economic and institutional stability, competition, public sector size and government effectiveness, credit information infrastructure (e.g., credit registries), the business environment (e.g., legal frameworks for contract enforcement), and financial supervisory and regulatory capacity.

This paper empirically examines the reaction of global financial markets across 38 economies to the COVID-19 outbreak, with a special focus on the dynamics of capital flow across 14 emerging market economies.

This paper introduces a new financial vulnerability index for emerging market economies by exploiting key differences in their business cycles relative to those of advanced economies. Information on the domestic price of risk, cost of dollar hedging and market-based measures of bank vulnerability combine to generate indexes significantly more effective in capturing macro-financial vulnerability and stress compared to those based on information in trade and global factors.

Central banks are facing growing challenges posed by aging, low productivity, new technology, and innovation especially after the global financial crisis triggered by the collapse of Lehman Brothers in 2008.

The Government of Indonesia is aiming to diversify the country’s food system by developing and strengthening high-value-added and more nutrient-rich value chains. In this regard, the government is focusing on diversifying into horticulture and small ruminant livestock. Undertaking Value Chain Analysis (VCA) is a critical part of this process as it helps in the identification of constraints and opportunities in relevant sectors. Agriculture funding and finance are vital components of this analytical process.

Emerging and frontier economies globally, including in Asia, experienced one of the sharpest reversals and sudden stops of portfolio flows following the heightened risk aversion from the onset of COVID-19 in early March 2020.

The global economy is on the brink of a recession as the coronavirus disease (COVID-19) pandemic has severely impacted businesses, jobs, and incomes. The pandemic-induced economic slowdown is driven by both the supply and demand sides of the economy. As many economies have imposed lockdown measures, factories have been closed, supply chains disrupted, and productivity has fallen, with mounting economic losses.

Fragility that periodically erupts into a full-blown financial crisis appears to be an integral feature of market-based financial systems in spite of the emergence of sophisticated risk management tools and regulatory systems. If anything, the increased frequency of modern crises underscores how difficult it is to diversify away systemic risk and that perceptions of perfectly stable financial systems are normally flawed, even if the source of the next crisis remains well concealed to the expert eye.

This paper studies whether there is a connection between finance and growth at the firm level. It employs a new dataset of 150,165 equity and bond issuances around the world, matched with income and balance sheet data for 62,653 listed firms in 65 countries over 1990-2016.

The COVID-19 crisis has triggered major disruptions for exchange rates and global capital flows. Cross-border portfolio investment stopped in many emerging markets as well as in some advanced economies in March 2020. Countries have not had to resort to capital controls. To support foreign currency liquidity, several emerging markets have intervened in the foreign exchange market and relaxed rules on capital inflows.

The COVID-19 pandemic has yet again unraveled global financial markets, putting Asia’s financial resilience to the test. As the economic losses associated with the pandemic are set to rise, Asian stocks have plunged and short-term portfolio flows reversed sharply in March 2020, putting local currencies under severe pressure.

Financial innovation in the form of new delivery channels, products, and providers has helped push out the frontier of access to finance and thus increase the bankable and banked population. Mobile money and crowdfunding platforms are prime examples for this.

The Cross-Border Settlement Infrastructure Forum (CSIF) was established under the Asian Bond Markets Initiative (ABMI) after being endorsed in May 2013 in Delhi at the meeting of finance ministers and central bank governors of the Association of Southeast Asian Nations (ASEAN), the People’s Republic of China, Japan, and the Republic of Korea - a grouping that is collectively known as ASEAN+3.

In recent years, turnovers of Foreign Exchange (FX) trading in Singapore and Hong Kong, China have outweighed those of Japan, and the gap between the two cities and Japan continues to stretch. The two cities consolidate trading of G10 currencies by institutional investors and others by advancing electronic trading.

Capital controls, policy measures used by governments to regulate cross-country financial flows, have become standard policy options in many emerging market economies. This paper will focus on what capital controls reveal about the state of the economy and the implications of such revelation for policy efficacy.

Technology is changing the landscape of the financial sector, increasing access to financial services in profound ways. These changes have been in motion for several years, affecting nearly all countries in the world. During the COVID-19 pandemic, technology has created new opportunities for digital financial services to accelerate and enhance financial inclusion, amid social distancing and containment measures. At the same time, the risks emerging prior to COVID-19, as digital financial services developed, are becoming even more relevant.

This paper aims at identifying effective macroprudential policy (MPP) interventions and analysing the macroeconomic conditions that promote them. It defines effective MPP interventions as those that stabilize its underlying target variable, such as credit growth, house price growth, etc.

The insulating properties of flexible exchange rates have long been a highly contentious issue in emerging markets - not least in Asian emerging markets. A number of recent theoretical and empirical studies question whether a trade-off exists between rigid exchange rate regimes and insulation from foreign shocks when the degree of international capital mobility is high.

This paper examines the emergent role of sustainable finance and investment in Japan and scrutinizes the need for the Japanese financial system to mitigate growing climate risks and support the transition of the Japanese economy to a low-carbon, sustainable pathway.

This paper investigates the links among US monetary policy, bank capital, and risk taking in international bank lending. Using syndicated loan data, this paper finds that low US interest rates spur the origination of risky dollar-denominated international loans through two distinct mechanisms.

This paper analyzes bank stock prices around the world to assess the impact of the COVID-19 pandemic on the banking sector. Using a global database of policy responses during the crisis, the paper also examines the role of financial sector policy announcements on the performance of bank stocks.

Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. This paper investigates the economic and institutional drivers of CBDC development and take stock of design efforts.

Over the past two decades, Asian economies have experienced rapid capital market growth and profound changes in the structure of their financial systems. This paper analyses key developments in advanced and emerging Asian economies since the global financial crisis, focusing on market intermediation of sovereign and corporate debt, equity market development, and the growth of alternative finance and structured products.

The paper empirically examines the implementation record of international financial regulation of the banking sector. The study finds that the size of the banking sector and the presence of global systemically important banks (GSIBs) are positively associated with a stronger implementation record.

Since the Asian financial crisis of 1997-1998, the Association of Southeast Asian Nations (ASEAN) has continuously worked on the context of financial integration and put tremendous effort into ensuring financial stability in the region. Two ASEAN Economic Community (AEC) blueprints have been endorsed with elements of financial integration and liberalization, toward its goal of achieving regional financial integration and the complement of financial inclusion and financial stability.

Foreign-currency exposures on an economy’s external balance sheet may jeopardize financial stability when the exchange rate depreciates. In fact, theory suggests that in such an environment it may be optimal for monetary policy in a floating regime to reduce exchange rate variation in order to dampen financial cycles by mimicking foreign monetary policy rather than focusing exclusively on stabilizing macroeconomic fundamentals.

The options presented in this paper were developed at the request of the Government of Pakistan (GoP) to contribute to the country’s disaster resilience and overall sustainable development. They are in line with Pakistan@100: Shaping the Future which detailed essential elements of sustainable growth for Pakistan including with disaster risk financing among them. They aim to comprehensively address financial resilience of Pakistan to natural disasters and increase access of the country to immediate and long-term financial resources in the aftermath of a disaster.

During the last 25 years, many advanced economies (AD) as well as several emerging economies (EME), have adopted inflation targeting to control the general rise in the price level, as price stability has been found to be a prerequisite for sustained economic growth as well as full employment.

This paper looks empirically at some economic effects of volatile exchange rates and financial conditions and examines policy responses for managing such volatility. It also sheds light on some economic costs that stem from volatile capital flows and exchange rates and analyzes how countries deploy their policy toolkits in response. The data-driven analysis should contribute to ongoing reflections about how to manage volatile capital flows and exchange rates both in Asian EMEs and more broadly.

Asia’s trade growth is expected to decelerate further in 2019, amid persistent global trade tensions. In 2018, Asia’s trade (by volume) grew by 4.0%, slower than the 7.3% growth in 2017. This came in tandem with the slowdown in global trade growth from 4.6% to 3.0%.

Net resident capital outflows of SEG member economies amounted to US$170 billion in end-2018. Net purchases of foreign assets by domestic residents (financial account assets) reached US$966 billion, while net purchases of domestic assets by non-residents (financial account liabilities) summed up to US$796 billion, bringing the net resident capital outflows to around US$170 billion, excluding net errors and omissions.

The transmission of financial shocks and the gains from international macroprudential policy coordination are studied in a two-region, core-periphery model with a global bank, a two-level financial structure, and imperfect financial integration. The model replicates the stylized facts associated with global banking shocks, with respect to output, credit, house prices, and real exchange rate fluctuations in recipient countries, as documented empirically.

SEG economies, as a group, remained a net capital exporter with higher current account surpluses and higher net international investment position. Net resident capital outflows were up, driven by higher resident direct and portfolio outflows notably from SEG Advanced Economies.

The report discusses key policy issues that enable and constrain digital savings market development and offers policy considerations within the context of the G20’s High-Level Principles for Digital Financial Inclusion. Based on current market observations, three policy considerations seem most important for facilitating digital savings account deployments: Enable banking institutions to pursue digital savings partnerships with nonbank entities. Support the development of interoperability between banks and nonbank e-money issuers. Harmonize customer due diligence standards for e-money wallets and low-risk bank deposits.

Financial inclusion can help promote development. Inclusive financial systems allow people to invest in their education and health, save for retirement, capitalize on business opportunities, and confront shocks. In the Europe and Central Asia region, there is great variation in financial inclusion.

With slowing global growth and increasing uncertainty clouding the global economic prospects, the Europe and Central Asia region faces a more challenging context than previously envisioned. Growth in the emerging markets and developing economies in the region slowed to 3.1 percent in 2018 and is projected to decline to 2.1 percent in 2019.

ASEAN economies have become more financially integrated over the past decade. Both de-facto integration and regional agreements under the ASEAN Economic Community (AEC) have resulted in increasing financial links among countries in the region. Regional initiatives in financial services liberalization, capital market development, and capital account liberalization have also been contributing to the deepening of regional financial markets.

In recent years much progress has been made in financial inclusion globally, including in Asia and the Pacific. Nevertheless, financial inclusion gaps remain large across and within countries. Close to half of the adult population in low- and middle-income Asia-Pacific economies does not have a bank account, and less than 10 percent has borrowed from formal financial institutions.

Looking back at Japanese banks’ activities in Asia since the 1980s, they have steadily expanded credit provision and other business operations amid the growing sophistication of needs while Euro-Area banks have restrained their activities in the region, particularly since the global economic and financial crisis in 2007-2008.

The Asia and Pacific region maintains healthy economic growth outlook. Excluding high-income economies, the region will grow at 6.0% this year and 5.8% in 2019. However, risks remain tilted to the downside with international trade conflicts escalating and elevated debt levels exposing the region’s financial vulnerability as United States (US) monetary policy normalization continues.

It is widely believed that local currency bond markets (LCBMs) can promote financial stability in developing countries. For instance, they can help mitigate the currency and maturity mismatch that contributed to the outbreak of the Asian financial crisis of 1997-1998. This paper empirically tests such conventional wisdom on the stabilizing effect of LCBMs.

The report “Cross-Border Interbank Payments and Settlements” is a cross-jurisdictional industry collaboration between Canada, Singapore and the United Kingdom to examine the existing challenges and frictions that arise when undertaking cross border payments. This report explores proposals for new and more efficient models for processing cross-border transactions.

This study examines the different motives of central bank FX market intervention. Particular attention is given to the financial stability motive by considering periods of capital outflows and residents’ cross-border exposures.

This annual OECD report provides a comprehensive and comparable picture of the use and functioning of public equity markets in Asia. The objective of the report is to inform policy discussions on how capital markets can serve their role to channel financial resources from households to productive investments in the real economy.

This paper examines the developments of cross-border portfolio assets and liabilities in the Asia and Pacific region over the periods of 2001-2017. Rapid increases in both portfolio foreign assets and liabilities have taken place particularly after the 2008-2009 global financial crisis.

During the last two decades, economies in East Asia and Pacific have been integrating internationally through trade and financial investments. One trend is puzzling. Whereas most of the trade integration has been within the region, most of the financial integration has been with countries outside the region. However, a closer examination of investment types shows that the relative lack of regional financial connectivity occurs mostly in equity, bonds, and bank syndicated loans (in so-called arm’s-length investments). The region is much more connected through foreign direct investment (FDI) (through both mergers & acquisitions and greenfield investments).

A growing number of fintech-related businesses are emerging in Southeast Asia, reflecting increased interest as part of the global fintech (financial technology) boom. The Internet and smartphones are spreading rapidly in Southeast Asia, and many of these new businesses are utilizing these technologies to find solutions to the region’s financial problems.

Net capital outflows of SEG member economies amounted to around US$300 billion as of end 2017. Gross resident capital outflows (financial account assets) reached US$1,158 billion, while gross non-resident capital inflows (financial account liabilities) summed up to US$869 billion, bringing the net capital outflows to US$289 billion, excluding net errors and omissions.

This paper looks back at past episodes of financial stress in Asia with a forward-looking perspective. It puts ourselves in the shoes of a contemporary observer with the data at hand and ask what evidence was available on the systematic build-up of vulnerabilities. This paper reconstructs a graphical narrative of banking and financial developments at the time.

Gauging foreign (domestic) biases as the deviation of foreign (domestic) investors’ actual portfolio allocation of a bond market from the same bond market’s weight in global bond market, this paper investigates the determinants of foreign and domestic investment biases in 41 global bond markets. It finds that foreign investors significantly overweigh markets that offer better risk-return profiles.

This paper seeks to draw lessons for developing countries based on a survey of the recent literature on financial globalization. First, while capital account openness holds promises (by potentially generating a lower cost of capital, better risk sharing, and stronger disciplines on policies), they do not always work out that way in the data. Distortions in the domestic financial market, international capital market, domestic labor market, and domestic public governance can all make financial globalization less beneficial for developing countries. Second, developing countries sometimes need to insulate themselves from foreign monetary policy shocks. The empirical pattern appears to be somewhere between a trilemma and a dilemma. While nominal exchange rate flexibility is insufficient for policy autonomy, capital flow management may be needed to confer more monetary policy autonomy.

Net resident capital outflows of SEG member economies amounted to US$96 billion as of mid-2018.2 Net acquisition of foreign assets by residents (financial account assets) reached US$690 billion, while net incurrence of liabilities to non-residents (financial account liabilities) summed up to US$594 billion, bringing the net resident capital outflows to around US$95 billion, excluding net errors and omissions.

Micro, small and medium-sized enterprises (MSMEs) make up the majority of enterprises in the world, providing employment and contributing significantly to national incomes. They can therefore play an important role in sustainable, inclusive economic growth and development and improved financial stability given appropriate conditions and timely support.

This paper provides an overview of the operational implementation of negative interest rates in Europe and Japan. Drawing attention to the fact that there is precedent for negative policy rates and negative money market rates, the paper addresses conceptual issues and summarizes measures which define negative interest rate policy.

This paper documents the evolution of international financial integration since the global financial crisis using an updated dataset on external assets and liabilities, covering over 210 economies for the period 1970-2015.

What is the role for supply and demand forces in determining movements in international banking flows? Answering this question is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses the question by using the method developed in Amiti and Weinstein (forthcoming) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks and idiosyncratic demand shocks for the period 2000-2016.

Shadow bank market share in residential mortgage origination nearly doubled from 2007-2015, with particularly dramatic growth among online “fintech” lenders. This paper studies how two forces, regulatory differences and technological advantages, contributed to this growth.

Asia and the Pacific is leading a recovery in world trade amid the continued uncertainty surrounding the global trade policy environment. In 2016, Asia’s trade (by volume) grew faster than global trade, but remained below its economic growth. Asia’s trade growth picked up to 1.7% in 2016 from 1.4% in 2015, while the world trade growth decelerated to 1.3% from 2.6%.

In his keynote address, Hyun-Song Shin discussed the central role dollar exchange rates play in setting financial conditions and real economic variables. He noted the challenge this poses for controlling monetary and financial conditions and ensuring economic stability in the region.

Access to financial services in the small states of the Pacific is being eroded. Weaknesses in Anti-Money Laundering and Combating the Financing of Terrorism compliance in the context of high levels of remittances are contributing to banks’ decisions to withdraw corresponding banking relationships and close bank accounts of money transfer operators. This paper gathers evidence on these developments in the small states of the Pacific, discuss the main drivers, and the potentially negative impact on the financial sector and macroeconomy.

The April 2017 Global Financial Stability Report (GFSR) finds that financial stability has continued to improve since last October. Economic activity has gained momentum and longer-term interest rates have risen, helping to boost the earnings of banks and insurance companies. Despite these improvements, however, threats to financial stability are emerging from elevated political and policy uncertainty around the globe.

When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but - in absence of frictions - there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. This paper shows that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending.

This paper documents a new international stylized fact describing the relationship between real exchange rates and external asset holdings. Economists have long argued that the real exchange rate is associated with the net international investment position, appreciating as external wealth increases. This mechanism has been seen as central for international payments equilibrium and relative price adjustments. However, it argues that the effect of external assets held by the public sector - reserve accumulation - on real exchange rates may be quite different from that of privately held external assets, and that capital controls are a critical factor behind this difference.

Correspondent banking relationships (CBRs), which facilitate global trade and economic activity, have been under pressure in several countries. So far, cross-border payments have remained stable and economic activity has been largely unaffected, despite a recent slight decrease in the number of CBRs. However, in a limited number of countries, financial fragilities have been accentuated as their cross-border flows are concentrated through fewer CBRs or maintained through alternative arrangements. These fragilities could undermine affected countries’ long-run growth and financial inclusion prospects by increasing costs of financial services and negatively affecting bank ratings.

The rapid scaling of digital stored-value products coincides with a sustained interest (initially triggered by the 2008 global financial crisis) in establishing or strengthening deposit insurance systems, and with emerging frameworks that extend deposit insurance coverage to financial products with characteristics similar to deposits in multiple countries.

Certain growth-promoting policies can have negative side-effects by increasing the vulnerability of economies to financial crises. Typical examples are greater openness to financial flows or more liberalised financial markets. This paper investigates whether the growth benefits of policy reforms in these growth enhancing areas, and others such as trade openness, exceed the possible costs of occasional, albeit potentially severe, crises for a sample of 100 developed and emerging economies from 1970 to 2010.

Contingent claims analysis applied to Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand shows no particular vulnerability to sovereign debt distress during recent years. However, the highly volatile “distance to distress” measure suggests that any of these countries may fall victim to a sudden loss in market confidence.

A number of factors and trends have driven the development of financial education policies in Asia and the Pacific in recent years. In some countries and economies, the development of financial education policies has been mostly spurred by high levels of financial exclusion, both among households and small businesses, in a context of low financial literacy, low general education and high poverty. In others, current or anticipated population ageing is also playing an important role. Various countries and economies in the region have engaged in the development of financial education and financial consumer protection policy responses to help address these issues.

Considering the deep and long-lasting impact of severe recessions, such as the 2008-09 financial crisis, it is important that measures be taken to minimise the risk of such event. But in doing so the benefits need to be balanced against the potential costs in terms of lower average growth that some of the actions to lower vulnerabilities to bad events could entail. Insofar as the risk-mitigating measures can involve a trade-off between growth and crisis risk, the most cost-effective actions need to be identified, spanning both macro and structural policies.

Given the heavy reliance on bank lending as the main source of financing in most Asian economies, banks could potentially play a pivotal role in monetary policy transmission. However, this paper finds that Asia’s bank lending channel or, more broadly, credit channel of domestic monetary policy is not very strong at the aggregate level. Using bank-level data for nine Asian economies during 2000-2013, it shows that heterogeneity of bank characteristics (e.g., ownership type, financial position), degree of foreign bank penetration of the domestic banking sector, and global financial conditions all have a bearing on the response of domestic credit to changes in domestic monetary policy, and may account for the apparently weak credit channel at aggregate level.

This paper analyzes the transmission of global liquidity to the ASEAN-5 countries (ASEAN-5), including the impact on financial landscapes and risks to financial stability. It finds that global liquidity transmission and changing financial landscapes have contributed to increases in risks to financial stability in ASEAN-5. Therefore, policymakers in ASEAN-5 should prepare for possible liquidity tightening, strengthen regulation of nonbanks, and establish a comprehensive financial stability framework. A number of countries are well-advanced in this process.

Following the 1997-1998 Asian financial crisis, financial authorities in ASEAN+3 embarked on several new initiatives for East Asia’s financial cooperation, including: (i) regional economic surveillance led by the Economic Review and Policy Dialogue (ERPD); (ii) a regional liquidity support facility, called the Chiang Mai Initiative (CMI); and (iii) local currency bond market development. The global financial crisis of 2007-2009 demonstrated the need to further strengthen East Asian financial cooperation.

The growth of financial markets has clearly outpaced the development of financial market regulations. With growing complexity in the world of finance and the resultant higher frequency of financial crises, all eyes have shifted toward the current inadequacy of financial regulation. With financial innovation and securitization becoming more popular, interconnectedness in the financial system is at its height, both for intra- and extra-sovereign jurisdictions.

A country’s financial sector plays a critical role in economic development. Research confirms that countries with more developed financial sectors tend to enjoy a sustained period of growth. Financial sector development is not simply a result of economic growth; it is also the driver for growth (Levine, Loayza and Beck 2000).

Consumer protection and financial literacy are essential pillars of a well functioning and stable financial system. As the global financial crisis demonstrated, inadequate attention to consumer protection and financial literacy can lead to financial instability. Though Shari’ah principles provide a strong foundation for consumer protection, the principles alone cannot provide adequate protection because not all providers are guided by ethical precepts and the practices have deviated from the principles. To safeguard the stability of the Islamic finance industry, consumer protection frameworks that cater to the specifics of Islamic financial products should be an integral part of regulatory frameworks.

This paper discusses adjustments of capital account restrictions and exchange rate regimes in East Asia. Monetary authorities have two options for these adjustments: gradual adjustments or rapid adjustments. It analyzes the costs and benefits for both adjustment options in each area, i.e., capital account restrictions and exchange rate regime.

Meeting the financing requirements of the post-2015 development agenda presents significant challenges in light of unfulfilled Millennium Development Goals (MDG) targets and the likely increased development targets post 2015. With weak fiscal balances even in middle income Asian economies, it is necessary to promote efficient allocation of resources and enhance availability of financial instruments to catalyze commercial financing to meet development goals and complement fiscal resources.

Developing Asia has exhibited rapid growth while saddled with relatively backward financial systems. One might conclude that the coexistence of sustained rapid growth and financial underdevelopment in developing Asia implies that an efficient financial sector is not indispensable for economic development. A more considered view would be that developing Asia grew rapidly despite, not because of, financial underdevelopment.

Growth in developing Asia will need to rely more on improvements in productivity growth and less on capital deepening. Although there is no single reform path to spur productivity growth, financial system deepening is central to a more efficient allocation of capital across sectors and can facilitate innovation and technology transfer. But malfunctioning financial systems can also result in the misallocation of resources, making it important that policymakers focus less on increasing the size of the financial sector and more on improving its intermediation function.

The financial sectors in Asian emerging-market economies are now relatively unlikely to provoke new financial crises, either because of reforms after the East Asian financial crisis in the later 1990s or because of the dominance of state-owned banks not subject to bank runs. Financial intermediation is surprisingly high and is consistent with higher rates of saving and investment and hence growth in the main economies of the region (as compared to, say, counterparts in Latin America).

Central banks have increasingly been given explicit financial stability mandates and as a result, macroprudential policies have become the buzz word in central bank and regulatory circles as well as in international financial institutions like the IMF and BIS. While macroprudential policies are a useful addition to the toolbox, there are various challenges that central banks and regulatory authorities would need to meet to obtain the intended outcomes.

Global cross-border claims increased by $11.6 billion between end September and end-December 2014 on an exchange rate-adjusted basis. Cross-border claims grew at a year-on-year rate of 5%, with lending to non-bank borrowers expanding faster (7%) than claims on banks (3%).

The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region DSGE model developed by the Economic Modeling Division of the IMF for policy and scenario analysis. This paper compares two versions of GIMF, GIMF with a conventional financial accelerator, where bank balance sheets do not play a prominent role, and GIMF with both a financial accelerator and a fully specified banking sector that can make lending losses, and that is regulated according to Basel-III. This paper illustrates the comparative macroeconomic properties of both models by presenting their responses to a wide range of fiscal, demand, supply and financial shocks.

Recent key challenges highlight the need to revisit Asia’s financial development. These include the region’s growth slowdown since the global crisis, compounded by a less benign external environment; internal structural challenges, such as population aging; and the maturing of much of the region into middle-income status.

This paper constructs an index of financial development for 23 Asian economies based on subindices of access, depth, and efficiency of financial institutions and markets and find evidence that economies with weaker financial systems are catching up to the Asian benchmark economies, namely Hong Kong, China; Japan; the Republic of Korea; and Singapore.

The establishment of the ASEAN Economic Community (AEC) at end-2015 has brought into sharp focus the issue of financial and economic integration in the region. This paper takes stock of ASEAN’s financial integration and prospects. ASEAN integration could accelerate in the years ahead; it will likely be a safe, gradual process consistent with the “ASEAN way” of consensus decision-making.

This paper presents an overview of exposures in the balance sheets of central banks, banks, and other depository institutions during the past decade, with emphasis on asset growth and currency composition.

Nothing could perhaps be as fitting and timely during this early part of 2015 than to review the historical development of East Asian economic integration in our final countdown to the establishment of the ASEAN Economic Community (AEC) at the latter part of this year.

This paper uses directed bilateral flow data on multiple dimensions of economic integration to construct a composite index of regional integration outcomes covering 19 regions in various parts of the world. As a first step, the multidimensional indicator is used to rank regions according to their current degree of regional integration, which allows for a direct comparison of Asia’s regional integration performance with those of other regions of the world. As a second step, the constructed indicator of regional integration outcomes is used as the output variable in a data envelopment analysis (DEA) to estimate Asia’s untapped regional integration potential.

This report reviews the foreign exchange (FX) and FX hedging markets in ASEAN+3 as they relate to cross-border investments in local currency bonds, and makes recommendations to facilitate the development of the markets and FX risk management.

This paper examines the evolution of intra-East Asian financial integration from 2001 to 2013. Most existing studies on this topic look primarily at asset holdings; it examines liability holdings as well. Using the International Monetary Fund’s Coordinated Portfolio Investment Survey data for equities, long-term debt, and short-term debt, the analysis generally supports the conventional wisdom that East Asian countries are more financially integrated with global financial centers than they are with each other.

This paper estimated the effect of the share of mortgage lending by individual banks (together with some control variables) on two measures of financial stability - the bank Z-score and the nonperforming loan ratio - for a sample of 212 banks in 19 emerging Asian economies for 2007-2013 from the Bankscope database.

Asia’s financial systems proved resilient to the shocks from the global financial crisis, and growth since then has been strong. But new challenges have emerged in the region’s economies, including demographics and aging, the need to diversify from bank-dominated systems, urbanization and infrastructure, and the rebalancing of economic activity. This book takes stock of the challenges facing the region today and how economic systems in Asia’s advanced and emerging market economies compare with the rest of the world.

This paper studies the impact of the US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error-correction model (GVECM) and conducting counterfactual analyses. It focuses on the effects of reductions in the US term and corporate spreads.

The 14 Pacific developing member countries (DMCs) of the Asian Development Bank (ADB) have opted for very different exchange rate regimes with varying degrees of flexibility. Whereas several microstates have adopted an external currency as their legal tender, others have decided to use a basket currency and yet others have chosen a managed float. The choice of exchange rate regime can have far reaching economic consequences.

2015 is a milestone year. The global community has arrived at a moment of understanding that current patterns of development, while delivering immense benefits to some countries and people, have left others far behind. The many returns from growth have also pushed against planetary boundaries. In the Asia and Pacific region, a phenomenal reduction in poverty has tailed high economic growth rates, yet patterns of consumption and production are increasingly skewed. Climate change - the result of deepening imbalances - is adding severe pressures likely to intensify over time.

Financial Market Infrastructures (FMIs) play a critical role in the financial system and the broader economy by facilitating the clearing, settlement and recording of monetary and other financial transactions and thereby maintaining and promoting financial stability and economic growth. However, the trends of financial sector development and interdependence of FMIs affect the assessment and management of payment and settlement risk for FMIs. It is thus important to know the status of FMIs in member economies as well as the trend and observations of their interdependence.

This paper examines bank credit growth in emerging markets before, during, and after the 2008-09 financial crisis using bank-level data, focusing on the role of bank ownership.

Output growth has slowed in several emerging markets since 2011 - a remarkable feature for a non-crisis period in EMs. Such synchronized slowdowns were largely unanticipated by scholars and forecasters alike. This paper attempts to shed light on the main drivers of growth surprises and synchronized slowdowns in emerging markets post-global financial crisis. It finds that lower trading partner demand was a key external factor in explaining these events during 2011-13, and that changes in external financing conditions have yet to play a role in EMs’ growth.

Following a prolonged period of unusual tranquility, volatility in financial markets ticked upwards in early August. Risk appetite took a dent, as escalating geopolitical tensions added to renewed concerns about the recovery. Equity prices fell, especially in Europe, high-yield credit spreads widened significantly, and yields of safe haven assets such as short-maturity German bunds fell into negative territory. But markets quickly rode out the turbulence. By early September, they had already recovered their losses, as worries over geopolitical tensions gave way to investors’ anticipation of further monetary stimulus in the euro area.

EM Asia has seen a transformation of its monetary policy environment over the past 2 decades. By far, the most relevant change has been the maturing of its financial systems and the growing relevance of the global financial cycle: financial inclusion has spread, financial markets have deepened and financial globalization has linked domestic markets closer to international markets.

Quantitative monetary policy at the zero interest bound should be understood as a “bond market carry trade.” Net interest earnings on the front end of the monetary carry trade should be retained - to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end.

Despite revisions to bank capital standards, fundamental shortcomings remain: the rules for setting capital requirements need to be simpler, and resolution should be an essential part of the capital requirement framework.

This paper estimates the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In this paper, monetary policy transmits to stock market price through three routes: money by itself, exchange rate, and inflation. The result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy.

This paper extends the model of Aoki et al. (2009) considering a two sector small open economy. It studies the interaction of borrowing, asset prices, and spillovers between tradable and non-tradable sectors. The results suggest that when it is difficult to enforce debtors to repay their debt unless it is secured by collateral, a productivity shock in the tradable sector generates an increase in asset prices and leverage that spills over to the non-tradable sector, generating an appreciation of the real exchange and an increase in domestic lending.

International banks greatly reduced their direct cross-border and local affiliates’ lending as the global financial crisis strained balance sheets, lowered borrower demand, and changed government policies. Using bilateral, lender-borrower country data and controlling for credit demand, this paper shows that reductions largely varied in line with markets’ prior assessments of banks’ vulnerabilities, with banks’ financial statement variables and lender-borrower country characteristics playing minor roles. It finds evidence that moving resources within banking groups became more restricted as drivers of reductions in direct cross-border loans differ from those for local affiliates’ lending, especially for impaired banking systems. Home bias induced by government interventions, however, affected both equally.

This paper analyzes the turnover of fixed income derivatives in seven currencies to test the hypothesis that market participants increasingly use contracts based on private rather than government rates to hedge and to take positions.

This paper investigates the effect that tight credit conditions had on outward foreign direct investment flows during the 2008-2010 global financial crisis. A difference-in-differences approach is used to isolate a “credit channel” impact of the global financial crisis on foreign direct investment. The global financial crisis had a stronger negative impact on the relative volume of outward foreign direct investment in financially vulnerable sectors in more financially developed countries, especially if these countries also experienced a banking crisis.

This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. It demonstrates the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large.

This paper proposes network entropy as a tool for measuring diversity of highly connected financial networks. The computation of network entropy hinges on eigenvector centrality and Shannon entropy.

The paper examines the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. It shows that on-balance sheet syndicated loan exposures account for almost one third of total cross-border loan exposures during this period. Furthermore, syndicated loan exposures increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis.

This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect.

This paper argues that sovereigns can reduce the likelihood of debt crises through debt management: for any given financing need arising from the budget, they can adjust the timing and size of market recourse in response to borrowing costs. It models debt management by letting the sovereign adopt a funding rule that can respond to interest rates, and characterize the optimal rule accounting for the sovereign’s large-agent status. It then decomposes default risk into a solvency component driven by fundamentals and a coordination component driven by self-fulfilling expectations, and uses numerical exercises to show that debt management operates on both.

This paper uses a cross-country panel framework to analyze the effect of net official flows (chiefly foreign exchange intervention) on current accounts. It finds that net official flows have a large but plausible effect on current account balances. The estimated effects are larger with instrumental variables (42 cents to the dollar on average compared to 24 without instruments), reflecting a possible downward bias in regressions without instruments owing to an endogenous response of net official flows to private financial flows.

This paper applies the probabilistic debt sustainability model developed for the euro area in Cline (2012, 2014) to sovereign debt in the United States and Japan. The results indicate that to avoid further increases in the expected ratio of public debt to GDP over the next decade, average annual primary deficits will need to be reduced by about 0.75 percent of GDP in the United States and by about 3 percent of GDP in Japan from the likely baselines as of mid-2014.

This paper examines how financial development influences foreign direct investment. The direct and indirect sector specific effects that source countries’ financial development and destination countries’ financial development can have on foreign direct investment are first identified in a conceptual framework.

Although cross-border bank lending has fallen sharply since the crisis, extending our bank ownership database from 1995-2009 up to 2013 shows only limited retrenchment in foreign bank presence. While banks from OECD countries reduced their foreign presence (but still represent 89% of foreign bank assets), those from emerging markets and developing countries expanded abroad and doubled their presence.

In Asia, small and medium-sized enterprises (SMEs) account for a major share of employment and dominate the economy. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital markets. Hence, looking for new methods of financing for SMEs is crucial.

Large banks have grown significantly in size and become more involved in market-based activities (those outside traditional bank lending) since the late 1990s. The advance of information technology and deregulation, which has led to a proliferation of financial markets, may have been the key driver of this process.

This paper examines the issues surrounding the implementation of global regulatory reforms - spearheaded by the G20 and mainly under the aegis of the Financial Stability Board (FSB) - in Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, and Viet Nam (BCLMV).

The prospect of a global renminbi (RMB) that could challenge the position of the dollar or the euro as a reserve currency has generated debate and captured the imagination of academics, pundits, and policymakers in recent years. Chinese officials embrace the limited goal of increasing usage of the RMB in international transactions without publicly advocating full reserve-currency status and free convertibility that such a status would require.

This paper tries to address the question of what could help make the renminbi a reserve currency. In recent years, the authorities in the People’s Republic of China (PRC) have made efforts to internationalize its currency through a two-track strategy: promotion of the use of the renminbi in the settlement of cross-border trade and investment, and liberalization of the capital account.

Despite the increasing recognition that the renminbi (RMB) may eventually become a key global currency, several important questions remain to be answered. This paper analyzes the benefits and costs of the RMB becoming an international currency.

Monetary policies pursued in response to the financial crisis have shown that changes in central bank balance sheets have major macroeconomic consequences. The New Classical Macroeconomics, which gained increasing sway from the late-1980s, had led to an exclusive focus on the policy rate and a neglect of balance sheet effects.

With the rise of the People’s Republic of China (PRC) as the world’s largest trading nation (measured by trade value) and second largest economic power (measured by GDP), its economic influence over the neighboring emerging economies in East Asia has also risen. The PRC introduced some exchange rate flexibility in July 2005, and in the wake of the global financial crisis has been pursuing a policy to internationalize its currency, the renminbi (RMB).

Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting currency appreciation has major implications for the composition of banking system balance sheets. The domestic monetary consequences depend on the nature of central bank liabilities that are the counterpart of forex reserves.

This paper evaluates the prospects for the renminbi’s role as an international currency and the implications for global financial markets. Although the People’s Republic of China (PRC) does not have either an open capital account or a flexible exchange rate, the renminbi has attained considerable traction as an international currency on account of the PRC’s rising shares of global trade and gross domestic product.

The People’s Bank of China and the Bank for International Settlements co-hosted a research conference on “Globalisation and Inflation Dynamics in Asia and the Pacific” on 23-24 September 2013 in Beijing. This was the wrap-up conference for the BIS Asian Office’s two-year research programme on globalisation and inflation that was launched by the Asian Consultative Council in February 2012. The event brought together senior officials and researchers from central banks, international organisations and academia.

The purpose of this paper is to examine what forms of monetary and financial cooperation will be desirable in East Asia with a focus on the spillover effects of currency misalignment on the Japanese economy in particular, thereby obtaining implications for monetary and financial cooperation in which Japan should engage in the region in the future.

This paper examines gross financial inflows to developing countries between 2000 and 2013, with a particular focus on the potential effects of quantitative easing policies in the United States and other high-income countries. The paper finds evidence for potential transmission of quantitative easing along observable liquidity, portfolio balancing, and confidence channels.

With revolutionary changes of the financial environment, due in particular to the progress of information and communication technology and the aftermath of the global financial crisis, central banks are facing new challenges in the pursuit of price, financial and exchange rate stability. This research paper looks at how central banks can enhance the effectiveness of monetary policy when in practice, the policy tools available to them are rather limited. In fact, many of them have no better option but short-term interest rates.

For the major advanced economies and the world as a whole, insufficient aggregate demand - that is, too little spending - impeded recovery from the Great Recession of 2008-09. By manipulating their currencies to boost their net exports, many countries made a bad situation worse for their trading partners, which saw demand shifted away. The world needs policies that increase total demand rather than policies that fight over the allocation of the existing amount of demand.

The ASEAN Corporate Governance Scorecard was introduced in 2011. The scorecard is a corporate governance initiative of the Association of Southeast Asian Nations (ASEAN), under the ASEAN Capital Markets Forum (ACMF) Implementation Plan for the development of an integrated capital market, to complement other ACMF initiatives and promote ASEAN as an asset class. The scorecard hopes to raise corporate governance standards of publicly listed companies (PLCs) in ASEAN countries and increase their visibility to investors.

This paper distinguishes among various types of capital and examines their effect on system-wide fragility. The analysis finds that higher quality forms of capital reduce the systemic risk contribution of banks, whereas lower quality forms can have a destabilizing impact, particularly during crisis periods. The impact of capital on systemic risk is less pronounced for smaller banks, for banks located in countries with more generous safety nets, and in countries with institutions that allow for better public and private monitoring of financial institutions.

This paper employs a threshold vector autoregression (TVAR) methodology in order to examine the nonlinear nature of the interactions among credit market conditions, monetary policy, and economic activity. It departs from the existing literature on the subject along two dimensions.

This paper examines how monetary policy should respond to nominal exchange rates in a New Keynesian open economy model that allows for a non-trivial role for sterilised intervention. The paper develops the argument against the backdrop of the evolving policy-making environment of Asian economies. Sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare.

The Asia Region Funds Passport (ARFP) is an initiative of the APEC Finance Ministers’ Process. The ARFP is a proposal for a multilaterally agreed framework allowing cross-border offers of eligible collective investment schemes (CIS) in ARFP member economies. Membership in the ARFP would be open to all APEC economies in the Asia region that meet certain criteria and at the discretion of individual economies.

Developing economies are seeking to promote financial inclusion, i.e., greater access to financial services for low-income households and firms, as part of their overall strategies for economic and financial development. This raises the question of whether financial stability and financial inclusion are, broadly speaking, substitutes or complements. In other words, does the move toward greater financial inclusion tend to increase or decrease financial stability?

There is a role for Asia’s financial sector to play to address the challenges associated with the region’s changing demographics and infrastructure investment needs. Enhancing financial innovation and integration in the region could facilitate intra-regional financial flows and mobilize resources from the aging savers in industrialized Asia to finance infrastructure investment in emerging Asia.

Deeper regional integration can be beneficial especially for regions along international borders. It can open up new markets on opposite sides of borders and give consumers wider access to cheaper goods. This paper uses data from five contiguous districts of India, Nepal, and Bangladesh in the northeast of the subcontinent to measure the degrees of trade complementarity between districts.

Multilateral development finance is at a critical juncture. In the past 70 years, it has developed through four distinct stages. The Bretton Woods conference established the World Bank and the International Monetary Fund in 1944 to finance post-war reconstruction and stabilize the global economy. The second stage saw the establishment of regional development banks in the 1950s and 1960s. This was followed by the emergence of subregional banks. In the fourth stage, from the mid-1970s to the 2000s, specialized vertical funds were established to address global issues, and private development finance expanded.

There is much speculation regarding a “race for dominance” among financial centers in Asia, arising from the anticipated financial opening up of the People's Republic of China. This frame of reference is, to an extent, a predilection that results from a traditional understanding of financial centers as possessing historical, geographic, and scale economy advantages. This paper, however, suggests that there is an alternative prism through which the evolution of financial centers in Asia needs to be viewed.

Debate continues over whether a monetary or currency union will be a viable alternative to the current exchange arrangements in East Asia. This paper adds to the literature by assessing the level of business cycle synchronization among 10 major East Asian economies which is considered a key precondition for a regional currency union.

Asia’s bank-centered financial systems require the reduced supply-demand gap in lending as a core policy pillar to improve small and medium-sized enterprise (SME) access to finance. Meanwhile, the diversification of financing modalities beyond conventional bank lending is another key policy pillar to better serve various financing needs of SMEs and expand their financial accessibility.

This paper presents a theoretical framework for policy making based on the “impossible trinity” or the “trilemma” hypothesis. A simple optimization model shows that placing more weight in terms of preference for each of the three open macroeconomic policies - exchange rate stability, financial market openness, and monetary policy independence - contributes to a higher level of achievement in that particular policy.

This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. It finds that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.

Since the 1980s and particularly since the 1990s, many emerging economies in Asia have undertaken significant efforts to liberalize and expand the scope and depth of their financial systems, though there is great heterogeneity across countries with regard to the timing of the reforms. The literature suggests several reasons for doing so.

This paper examines how the financial activities of non-financial corporates (NFCs) in international markets potentially affects domestic monetary aggregates and financial conditions. Monetary aggregates reflect, in part, the activities of NFCs, who channel capital market financing into the domestic banking system, thereby influencing funding conditions and credit availability.

The growing weight of the People’s Republic of China (PRC) in the world economy, measured by gross domestic product (GDP) and trade volume, has intensified debate on the potential international role of its currency - the renminbi (RMB). This paper provides an overview of RMB internationalization issues. Reviewing the current state of RMB internationalization, the paper finds that much progress has been made on RMB settlements for trade involving the PRC and on RMB-denominated bond issuance in Hong Kong, China, but that RMB internationalization is still limited due to capital account controls.

If the criteria for an institution’s success are diffusion and longevity, then central banking has been hugely successful. But if the criterion is the degree to which it has achieved its goals, then the evaluation has to be more nuanced. Historically, those goals have included a changing mix of financial and monetary stability. Attaining monetary and financial stability simultaneously has proved elusive across regimes.

This paper studies the effects of the new Basel III liquidity regulations in jurisdictions with a limited supply of high-quality liquid assets. Using a model based on Bech and Keister (2013), it shows how introducing a liquidity coverage ratio in such settings can have significant side effects, leading to a large liquidity premium and pushing the short-term interest rate to the floor of the central bank’s rate corridor.

Using three distinct approaches - statistical filtering, production function, and multivariate model - this paper estimates potential growth for the People's Republic of China, India, and five ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam) during 1993-2013.

In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why.

In the run-up to the financial crisis, the world economy was characterized by large and growing current account imbalances. Since the onset of the crisis, the People’s Republic of China and the United States have rebalanced. As a share of gross domestic product, their current account imbalances are now less than half their pre-crisis levels.

For many observers, internationalization is the yuan’s manifest destiny - an irresistible byproduct of the remarkable economic success of the People’s Republic of China (PRC). But is such confidence warranted? Recent history has seen the emergence of other currencies that were also expected, at least for a while, to attain wide, growing cross-border use. These included the deutsche mark (DM), the Japanese yen, and the euro (successor to the DM).

Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic” and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals.

The paper shows that foreign holdings of local currency government bonds in emerging market countries (EMs) have reduced bond yields but have somewhat increased yield volatility in the post-Lehman period. Econometric analyses conducted from a sample of 12 EMs demonstrate that these results are robust and causal.

Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China’s offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community.

This paper examines whether the renminbi (RMB) has supplanted the US dollar as the major anchor currency in the currency baskets of East Asian economies.

In recent years, macroprudential policy has become an increasingly active policy area. Many countries have adopted it as a tool to safeguard financial stability, in particular to deal with the credit and asset price cycles driven by global capital flows. This paper reviews the use of key macroprudential instruments and capital flow measures in 13 Asian economies and 33 economies in other regions since 2000, and constructs various macroprudential policy indices, aggregating sub-indices on key instruments.

As Asia considers greater harmonization and integration of its financial systems, it would be well-advised to consider the experience of Europe, particularly the eurozone. There are many lessons to be drawn from Europe about how to implement such integration, mostly negative. It is particularly evident that moving to a currency union had major unanticipated consequences for the ability to manage integration of financial systems within the eurozone. Monetary union sharply reduced the ability of the member states of the eurozone to manage their macroeconomic and macroprudential policies to preserve financial stability.

This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a “capital war” that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons.

The Asian financial crisis (1997-1998) and the global financial crisis (2007-2009) highlighted the potential value of financial regionalism, i.e., regional-level cooperation in financial policy. This paper argues that there is a mediating role for regional-level institutions of financial regulation between national regulators in Asia and global-level institutions such as the International Monetary Fund and the Financial Stability Board.

The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability.

The global long-term interest rate now matters much more for the monetary policy choices facing emerging market economies than a decade ago. The low or negative term premium in the yield curve in the advanced economies from mid-2010 has pushed international investors into EM local bond markets: by lowering local long rates, this has considerably eased monetary conditions in the emerging markets. It has also encouraged much increased foreign currency borrowing in international bond markets by emerging market corporations, much of it by affiliates offshore. These developments strengthen the feedback effects between bond and foreign exchange markets. They also have significant implications for local banking systems.

The structural changes that have occurred in the past 25 years in the economic and financial environment are comparable in scale to those in international politics. In particular, “/1” has been crucial in two respects.

Asia proved to be remarkably resilient in the face of the global financial crisis, but why was its output performance stronger than that of other regions? The paper shows that better initial conditions - in the form of lower external and financial vulnerabilities - contributed significantly to Asia’s resilience.

Using a novel database on capital flow measures in Asia over 2004-2013, this paper investigates the impact of bond inflow measures on the cross-market correlations of weekly bond fund flows and of daily bond returns in 12 Asia-Pacific economies, after controlling for global, regional and local factors. It finds that a bond inflow measure taken by a country tends to increase the correlation of bond flows into the country with those into other countries in the region.

This paper considers the role of exchange rate risk in influencing local currency sovereign bond yields in emerging market economies (EMEs). It explicitly accounts for exchange rate expectations and uncertainty around them, as measured by exchange rate volatility.

The paper assesses how close Asian countries are to an Optimal Currency Area in terms of business cycle synchronization, with a focus on supply shock asymmetry. Based on a Structural VAR model, the importance of symmetric and asymmetric supply shocks is tested for all ASEAN+3 countries. In addition, a spatial approach is used to analyze its impact on the whole Asian region and on pairs of Asian countries.

Markets remain buoyant despite mid-October’s spike in the volatility of most asset classes. This sharp retreat in risk appetite reflected growing uncertainty about the global economic outlook and monetary policy stance, as well as increased geopolitical tensions. As selling pressure increased, market liquidity temporarily dried up, amplifying market movements.

The impact of monetary policy in large advanced countries on emerging market economies - dubbed spillovers - is hotly debated in global and national policy circles. When the U.S. resorted to unconventional monetary policy, spillovers on asset prices and capital flows were significant, though remained smaller in countries with better fundamentals

This paper reviews the role of long-term interest rates in international monetary transmission and related policy challenges in the wake of exceptionally easy US monetary policy. It employs a panel VAR model to examine the impact of a very low US term premium on relatively small open Asian economies.

Capital markets can improve risk sharing and the efficiency with which capital is allocated to the real economy, boosting economic growth and welfare. However, despite these potential benefits, not all countries have well developed capital markets. Moreover, government-led initiatives to develop local capital markets have had mixed success. This paper reviews the literature on the benefits and costs of developing local capital markets, and describes the challenges faced in the development of such markets. The paper concludes with a set of policy recommendations emerging from this literature.

This paper develops a variation of the macroeconomic model of banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates countercyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig.

This paper investigates global factors associated with bank capital flows. It formulates a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows.

The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market.

Financial integration has many potential economic benefits. However, it also carries potential risks. In ASEAN, since its financial sector is generally bank-dominated, the banking sector is a key driver in the financial integration process. The ASEAN Banking Integration Framework (ABIF) aims to provide financial stability in the region and achieve multilateral liberalization in the banking sector by 2020 for ASEAN commercial banks.

Based on a novel quarterly dataset for 52 countries for the period 1970-2011, this paper analyzes the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy.

This paper analyzes the effects of the trade and financial networks on the propagation of the global financial crisis of 2008. It adopts a new methodology that incorporates a dynamic network approach into econometric analysis. Some interesting results are obtained.

In analyzing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century.

“Abenomics” refers to the economic policies advocated by Prime Minister Shinzo Abe who became prime minister of Japan for a second time when his party, the Liberal Democratic Party, won an overwhelming majority at the general election in December 2012.

The four major banks (BOJ, FRB, BOE and ECB) have adopted unconventional monetary policy, or broadly-defined quantitative easing (QE), in the last several years. The broadly-defined QE can be classified into comprehensive easing (CE) and pure-QE. The former is aimed at purchasing assets of dysfunctional markets and the latter is aimed at expanding monetary base to stimulate demands.

This paper discusses Japan’s strategy for Asian monetary integration. It argues that Japan faces three major policy challenges when promoting intraregional exchange rate stability.

This paper analyzes the optimal transition of the exchange rate regime in the People’s Republic of China (PRC). How the PRC can successfully reach the desired regime - whether a basket peg or floating regime - from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model.

This paper documents the behavior of macro and credit variables during episodes of capital inflows reversals in economies with different degrees of exchange rate flexibility. It finds that exchange rate flexibility is associated with milder credit growth during the boom but, even though smaller than in more rigid regimes, it cannot shield the economy from a credit reversal.

This paper considers the question of whether international banks learn from their previous crisis experiences and reduce their lending to developing countries in the event of a financial crisis. The analysis combines a bank-level dataset of bank activity and ownership with country-level data on the stock of historical crisis events between 1800 and 2005.

This study presents evidence of the renminbi’s growing influence in the Asia-Pacific region. The CNH market - the offshore renminbi foreign exchange market in Hong Kong, China - is found to exert an effect on Asian currencies that is distinct from that of the onshore (CNY) market.

Domestic financial market development is a key determinant of a currency’s international status, and financial depth and market liquidity are two essential attributes for an international currency. This paper discusses the status of the People’s Republic of China’s (PRC) financial markets and their depth and liquidity conditions.

This paper investigates the determinants of currency choice for trade invoicing in a cross-country context while focusing on the link between capital account liberalization and its impact on the use of the renminbi (RMB). It finds that while countries with more developed financial markets tend to invoice less in the US dollar, countries with more open capital accounts tend to invoice in either the euro or their home currency.

The People’s Republic of China (PRC) has been quite aggressive recently in promoting the international use of its currency, the renminbi. Historical experience suggests that an active offshore market is essential for a global currency. Indeed, anecdotal evidence affirms the role of offshore markets in pushing the renminbi currency to the world.

As the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. This paper assesses the implications of a normalization of policy and activity in high-income countries for financial flows and crisis risks in developing countries.

This paper develops a multilateral currency system where national currencies are used for trade settlement in East Asia, comprising the Association of Southeast Asian Nations (ASEAN) member countries, the People’s Republic of China, Japan, and the Republic of Korea (ASEAN+3).

This paper analyzes the evolution of East Asian monetary policy frameworks over the past two decades, chiefly in response to shocks from the Asian financial crisis of 1997-1998 and the global financial crisis (GFC) of 2007-2009. The Asian financial crisis showed the importance of exchange rate flexibility and credible policy frameworks, leading to increased central bank independence, greater focus on inflation policy and more flexible exchange rates.

This study primarily examines the extent of daily foreign exchange intervention by the Bangko Sentral ng Pilipinas (BSP) between 2005 and 2010, and its effectiveness in controlling the daily volatility of the exchange rate. Using an exponential GARCH model, it finds that participation in the spot market remains the main method used by the BSP to influence the volatility of the exchange rate, while intervention in the foreign exchange market through derivatives is secondary.

Unlike most other countries, Singapore has adopted the use of the exchange rate rather than the interest rate as the instrument of monetary policy. The choice of the exchange rate is predicated on the Singapore economy’s small size and its high degree of openness to trade and capital flows. The basket, band and crawl features of the exchange rate system have served as an effective anchor of price stability, keeping inflation low and stable over the past 30 years. In addition, Singapore has complemented monetary policy with micro- and macroprudential measures to ensure overall price and financial stability in the economy.

The European and Asian financial crises are the two most recent major regional crises. This paper compares their origins and evolution. The origins of the two sets of crises were different in some respects, but broadly similar. The two sets of crises also shared similarities in their evolution, but here the differences were more significant.

This paper analyzes the determinants of corporate saving in the form of changes in the stock of cash for 11 Asian economies using firm-level data from the Oriana Database for the 2002-2011 period. It finds some evidence that cash flow has a positive impact on the change in the stock of cash, which suggests that Asian firms are borrowing constrained and that they save more when their cash flow increases so that they will be able to finance future investments.

The purpose of the study is to examine the development and barriers to harmonization and integration among the capital markets of members of the South Asian Association for Regional Cooperation (SAARC) and to enumerate steps to achieving harmonization and integration. There are substantial benefits to greater capital market harmonization but also significant obstacles.

This paper analyzes the lending behavior of foreign owned banks during the recent global crisis. Using bank level panel data for countries in Central and Eastern Europe, East Asia, and Latin America, the paper explores the role of affiliate and parent financial characteristics, host location, as well as the impact of parent geographic origin and reach on foreign banks’ credit growth.

This paper reviews the East Asian experience with financial integration, how economies in the region have responded to shocks, and what they may do to continue to thrive in the future. It discusses openness to capital flows as a key aspect of financial integration, briefly considering the theoretical underpinnings and empirical evidence for the benefits of openness.

Given the rapid and volatile capital flows that emerging market economies (EMEs) have experienced in the years following the global financial crisis, foreign exchange market developments and the corresponding intervention by EME central banks have quickly become pertinent issues. To shed light on some of these issues from Malaysia’s perspective, this paper first highlights the motives for and recent trends in Malaysia’s foreign exchange interventions, followed by a discussion of their effectiveness. The paper then elaborates on Malaysia’s efforts to improve the management of foreign exchange volatility. Finally, the paper concludes by highlighting the importance of collaborative efforts to address the root cause of volatile capital flows.

This paper provides an overview of the developments in the Korean foreign exchange market and the Bank of Korea's foreign exchange interventions since the introduction of the floating exchange rate regime in the Republic of Korea. It deals with institutional aspects such as the objectives, instruments employed, tactics and strategies of the interventions, as well as the sterilisation practices. It also explains why the won has been so volatile during the crisis period, and how the Korean authorities have addressed the vulnerability of the won via interventions and other macroprudential regulations.

Amid the evolving global financial landscape, different speeds of economic adjustments and spillovers of unconventional monetary policy, central banks in emerging economies, including Thailand, have encountered volatile capital flows and greater difficulties in maintaining economic stability. The conduct of exchange rate policy has been particularly challenging in these economies.

For a small open economy like Indonesia, exchange rate movement does not always reflect fundamental value. Increasing exchange rate volatility often occurs as a result of volatile capital flows, irrational behaviour of market players, the microstructure conditions of the market, and offshore market influence. In this case, relying solely on interest rate policy to achieve the inflation target and maintain stability is not always sufficient.

The exchange rate of the rupee is determined largely by the market forces of demand and supply. The Reserve Bank of India has intervened occasionally to maintain orderly conditions and curb excessive volatility in the foreign exchange market. Being a current account deficit country, India is dependent on capital flows for financing the current account deficit. Given the dependence on volatile capital flows, there may be a case for augmenting forex reserves when the situation permits without any bias for a particular exchange rate band.

In the currency wars of the 1920s and 1930s, various nations fell off the gold standard and in so doing experienced deep devaluations. But under the postwar dollar standard, the central position of the US was key to maintaining the peace, until the Bretton Woods system of fixed dollar exchange parities fell apart after the so-called “Nixon Shock” of 1971. Now, without much fear of retaliation, the US can initiate more limited currency warfare - as with American “Japan bashing” from the late 1970s to mid-1990s to appreciate the yen, or “China bashing” since 2002 to appreciate the renminbi.

This paper documents the major policy reforms to Hong Kong, China’s Linked Exchange Rate System (LERS) that have enabled it to evolve into the highly credible, efficient, and transparent system it is today. It discusses the operating mechanism of the system in adjusting capital flows, and the role the Hong Kong Monetary Authority plays in maintaining the smooth functioning of the LERS.

Financial inclusion is an international policy priority and demand-side initiatives including financial education have an important role to play in helping individuals to access and use appropriate, formal financial products. In 2010, under the support of the Russian Trust Fund for Financial Literacy and Education, the OECD/INFE launched a project on the role of financial education in financial inclusion.

The global financial crisis originated in advanced economies, but had a major impact on emerging markets. The impact, however, was not uniform. Even in a relatively homogenous group of countries such as ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand), there were considerable differences both in terms of instantaneous impact of the crisis and in terms of output performance relative to trend.

A likely image of the current state of the literature on financial sector development is that of a Swiss cheese with many holes inside important areas of knowledge. The aim of this synthesis paper is to map the current knowledge and ignorance (i.e., holes) in the literature by providing a narrative for the empirical findings of a comprehensive literature review concerning the quantitative effects of financial development on economic growth and employment, and various determinants of financial sector development.

This paper explores the determinants of Japanese banks’ overseas expansion and assesses whether the growing cross-border activity will continue under the new macroeconomic policies referred as “Abenomics”. The analysis finds that Japanese banks are well positioned to scale up foreign exposures, thanks to their relative resilient balance sheets and continued growth in the region.

This paper discusses how financial crises in emerging Asia and Japan worked as catalysts for legal reforms. The responses of six Asian countries with different legal histories to financial crises that posed similar challenges are of both legal and economic interest.

This publication is a collection of the papers cum notes prepared for and included here as Proceedings of the High-Level Conference on “Finding Asia’s New Sustainable Growth Model Post Global Financial Crisis (GFC): The Role of the Central Banks” held at Sasana Kijang, Bank Negara Malaysia, Kuala Lumpur, Malaysia, from 6-8 November 2012. The High-Level Conference was an outreach of the signature SEACEN research project for OP2012 to provide a forum for discussions on policy challenges faced by central banks in promoting sustainable economic growth and providing an environment conducive for financial, monetary and economic stability in the aftermath of the global financial crisis.

The Association of Southeast Asian Nations (ASEAN) is expected to benefit from the significant growth in the Asia-Pacific payments market. Growth in economic activity would increase the size, scale, and scope of payment transactions. Enabling the scale and scope of payments would in turn increase economic activity. This would also require national payment systems to be regionalized and operate with cross-border and multi-currency capabilities.

This paper analyses the extent to which financial integration impacts the manner in which terms of trade affect business cycles in emerging economies. Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle.

This paper aims to quantify the political risk effect and its different economic implications in normal and crisis situations through the proxy analysis of election and the sovereign bond spreads.

This paper presents empirical evidence on asset market linkages between the People's Republic of China and Asia and how these linkages have shifted during and after the global financial crisis of 2008-2009. We find only weak cross-country linkages in longer-term interest rates, but much stronger linkages in equity markets. This finding is consistent with the greater development and liberalization of equity markets relative to bond markets in the People's Republic of China, as well as increasing business and trade linkages in the region.

Driven by waves of foreign capital inflows and outflows, Indonesia, the Republic of Korea, and Thailand - among several other emerging markets - have resorted to capital control policy since 2006. Are capital controls effective? Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent Asian and Latin American countries implementing them. This paper focuses on Brazil, which instituted five changes in its capital account regime over 2008-2011.

The squeeze in US dollar liquidity that emerged with the global financial crisis highlighted the risks associated with the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions.

Using panel data for 15 economies from 2001-12, this paper identifies determinants of central bank foreign exchange intervention in emerging markets (“EMs”) with flexible to moderately managed exchange rates.

An Asian Currency Unit (ACU) index is constructed using an alternative procedure which minimizes a basket or portfolio of assets expressed in terms of national currencies. Using this estimated ACU index and an ACU Deviation Indicator, the main finding of this study based on the current trajectory of East Asian currencies relative to this regional ACU average or benchmark is that there is a formation of two contrasting groups of countries in the region - one a group of strong currencies and the other a group of weak currencies.

To the extent that financial contagion from the United States and the euro area crisis has occurred in Asia, this paper focuses on the importance of strengthening the regional financial safety nets.

A new regional community is in the making in Southeast Asia. At the 12th Summit of the Association of Southeast Asian Nations (ASEAN) in January 2007, the member countries affirmed their commitment to create the ASEAN Economic Community (AEC) by 2015 and “to transform ASEAN into a region with free movement of goods, services, investment, and skilled labor, and freer flow of capital.”

Financial integration is a multidimensional process through which allocation of financial assets becomes increasingly borderless. This paper assesses the progress achieved thus far in capital market integration in Asia, and compares regional capital market integration with global financial integration.

This paper studies the effects of the United States’ (US) quantitative easing on Asia by examining capital flows and financial markets. After the global financial crisis, Asian economies with more open and developed capital markets experienced greater swings in capital inflows. In particular, large capital flows were manifest more in portfolio investment and other investment such as bank loans than in foreign direct investment.

Although growth deceleration in the People’s Republic of China (PRC) is inevitable, if the country’s new direction of financial policy (on exchange rate, capital flows, banking, capital market) can be achieved, it will be good not only for the country but also for the rest of Asia. This is consistent with the increased degree of Asia’s integration and interdependence.

Japan’s “two lost decades” perhaps represent an extreme example of a weak recovery from a financial crisis, and are now referred to as “Japanization.” More recently, widespread stagnation in advanced economies in the wake of the global financial crisis led to fears that Japanization might spread to other countries.

The global financial crisis of 2008-2009 illustrates how financial turmoil in advanced economies could trigger severe financial stress in emerging markets. Previous studies dealing with financial crises and contagion show the linkages through which financial stress are transmitted from advanced to emerging markets. This paper extends the existing literature on the use of financial stress index (FSI) in understanding the channels of financial transmission in emerging market economies.

The recent crises highlighted the role of cross-border banking linkages. This paper proposes two new measures for better capturing creditor banking systems’ foreign credit exposures and borrower countries’ reliance on foreign bank credit, by combining BIS data with bank level data. The results indicate that the proposed refinements matter, especially when foreign bank affiliates’ funding relies heavily on local deposits.

The unprecedented collapse of international interbank borrowing was a prominent feature of the global financial crisis that started in August 2007. This paper focuses on the drivers of the retrenchment from 32 advanced and emerging banking systems. Using novel risk-weighted indexes the paper examines whether the banking systems’ access to credit was related to their domestic financial soundness and exposure to distressed international counterparties. The empirical findings suggest that both domestic and international risk factors contributed to the decline in international interbank borrowing during the crisis.

The European Union (EU) has traditionally been an important economic partner for Asia. In addition to absorbing a significant share of the region’s exports, the EU has been a major source of foreign direct investment and other capital flows into the region. In light of such close economic linkages between the EU and Asia, the euro crisis will undoubtedly influence Asia’s short-term macroeconomic outlook. The key question, however, is how big the impact will be. This paper tries to answer this by examining both the trade and financial channels of crisis transmission.

The Chiang Mai Initiative Multilateralisation (CMIM) and the ASEAN+3 Macroeconomic Research Office (AMRO), established in March 2010 and May 2011, respectively, have made substantial headway. But despite the rapid progress, a series of fundamental questions have been raised, particularly about the size of the CMIM facility.

The prolonged investment decline in post-Asian crisis emerging Asia, in contrast to the swift recovery of economic growth, has remained a puzzle. This paper shows that the post-crisis investment recession has been mainly concentrated in the nontradable sector, and hypothesizes that the slowdown is because firms operating in that sector are financially constrained. Empirical results based on macro and firm-level data from Indonesia, Malaysia, and Thailand (ASEAN-3) support this hypothesis.

Financial conditions indexes (FCIs) are constructed for five Asian economies, namely, Hong Kong, China; Japan; the Republic of Korea; Malaysia; and Singapore, using a principal component analysis (PCA) methodology from Hatzius et al. (2010) and quarterly data. Various financial stress indicators are included, allowing the constructed Financial Condition Index to capture important episodes in each economy’s financial history.

Under near zero United States (US) interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitously.

This paper focuses on the relevance to emerging economies of three major financial reforms following the global financial crisis of 2007-2009: (1) the improved capital requirements intended to reduce the risk of bank failure (“Basel III”), (2) the improved recovery and resolution regimes for global banks, and (3) the development of supervisory colleges of cross-border financial institutions to improve supervisory cooperation and convergence. The paper also addresses the implications of these regulatory reforms for Asian emerging markets.

Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined.

Confidence in combining inflation-targeting cum-flexible-exchange-rate regimes with isolated microprudential regulation as a means to guarantee both macroeconomic and financial stability has been shattered by the scale and synchronization of asset price booms and busts that preceded the current global financial crisis.

This paper employs multivariate Generalized Autoregressive Conditional Heteroskedastic (GARCH) models with a Baba-Engle-Kraft-Kroner (BEKK) specification to show significant shock and volatility spillovers from mature bond markets into select emerging Asian local currency bond markets.

The purpose of this study is to investigate how firms responded to the deterioration of bank health during the financially turbulent periods in the 2000s in making investment decisions and in meeting demand for liquidity. A rise in uncertainty regarding the ability to obtain external funds may have induced firms to rely on internal funds to finance investment activities.