Asian economies are commended for improving their external balances and building self-insurance by accumulating large amounts of reserves. However, whether these would be sufficient to provide adequate protection against a reversal of capital flows is contentious. After the Asian crisis external vulnerability came to be assessed in terms of adequacy of reserves to meet short-term external dollar debt. However, short-term debt is not always the most important source of drain on reserves. Currencies can come under stress if there is a significant foreign presence in domestic markets and the capital account is open for residents. A rapid exit could create significant turbulence even though losses from declines in assets and currencies fall on foreign investors and mitigate the drain of reserves.
In all four Asian countries directly hit by the 1997 crisis, international reserves now meet short-term external dollar debt. But they do not always leave much room to accommodate a sizeable and sustained exit of foreigners from domestic markets and capital flight* by residents.* "Capital flight" in an environment of free capital flow means selling the domestic currency in the foreign exchange market for a foreign currency and depositing this in foreign financial institutions. This depresses the exchange value of the domestic currency and lowers the price of the domestic assets being sold. In volume ("rushing for the door"), this puts pressure on domestic economies owing to existing commitments. It does not mean taking the domestic currency out of the country.
Oupblog
The Asian financial crisis: lessons learned and unlearned
The Asian financial crisis: lessons learned and unlearned
Yilmaz Akyüz | former Director of Division on Globalization and Development Strategies at UNCTAD, principal author and head of the team preparing the Trade and Development Report, and coordinator of research support to the Group-of-24 in the IMF on International Monetary and Financial Issues
1 comment:
It does not mean taking the domestic currency out of the country
It depends on what is meant by "taking it out of the country".
Suppose Exxon wants to transfer dollars - deposited at Citibank in NY - to a subsidiary in London that holds its deposits at Lloyds.
No reserves (central bank money) leave the US. They remain deposited at the Fed - an asset of Citibank.
Citibank owed a dollar deposit to Exxon. With the transfer it now owes that dollar deposit to Lloyds.
Lloyds expanded its balance sheet: it holds a new asset (a dollar deposit at Citibank in NYC) and a new liability (a dollar deposit owed to Exxon's subsidiary in Britain).
And Lloyds can now expand its balance sheet in dollars by creating new loans and new dollar deposits. Its "reserves" will be its deposit at Citibank New York.
In conclusion: no reserves have left the US but probably billions of new dollars will be created as liabilities of a bank domiciled outside of the US.
These dollars are not part of the US money supply. The Fed doesn't even care about the size of such dollar balances held outside the US banking system. They are not "in" the US but they are dollars all the same.
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