Capital flows and the balance sheet effect. The direct impact of ultra-easy money policy in advanced economies during the GFC was to spark massive capital inflows to emerging markets (EM) including Indonesia (see Chart 3). On the one hand, this led to an increase of EM liquidity, on the other it posed greater risks to EM financial stability. Chart 3. Gross and Net Capital Flows in Select Emerging Asian Economies 150 pre- AFC AFC post-AFC pre-GFC GFC post-GFC 100 50 -50 -100 -150 Q4 1996 QI 1999 Q22001 Q3 2003 Q42005 QI 2008 Q2 2010 Q1 2013 Gross inflow Gross outflow Net flow Notes: Based on 4-quarter moving sums for Indonesia, the Republic of Korea, the Philippines, and Thailand. Source: Taken from Azis, IJ & D. Yarcia (2015) “How Capital Flows in the Midst of Excess Savings Affect Macrofinancial Vulnerability," Asian Development Review, vol. 32, no. 2, pp. 115-152 Questions: a. Explain why massive capital inflows can be a double-edged sword for emerging markets including Indonesia b. What would be the mechanism of capital outflows affecting the balance sheets of firms that could eventually worsen the macroeconomic conditions S billion

Capital flows and the balance sheet effect. The direct impact of ultra-easy money policy in advanced economies during the GFC was to spark massive capital inflows to emerging markets (EM) including Indonesia (see Chart 3). On the one hand, this led to an increase of EM liquidity, on the other it posed greater risks to EM financial stability. Chart 3. Gross and Net Capital Flows in Select Emerging Asian Economies 150 pre- AFC AFC post-AFC pre-GFC GFC post-GFC 100 50 -50 -100 -150 Q4 1996 QI 1999 Q22001 Q3 2003 Q42005 QI 2008 Q2 2010 Q1 2013 Gross inflow Gross outflow Net flow Notes: Based on 4-quarter moving sums for Indonesia, the Republic of Korea, the Philippines, and Thailand. Source: Taken from Azis, IJ & D. Yarcia (2015) “How Capital Flows in the Midst of Excess Savings Affect Macrofinancial Vulnerability," Asian Development Review, vol. 32, no. 2, pp. 115-152 Questions: a. Explain why massive capital inflows can be a double-edged sword for emerging markets including Indonesia b. What would be the mechanism of capital outflows affecting the balance sheets of firms that could eventually worsen the macroeconomic conditions S billion

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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