Was the degree of financial integration in selected East Asian economies influenced by the 1997 Asia

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Was the degree of financial integration in
selected East Asian economies influenced by the
1997 Asian crisis? A view through the
saving-investment relationshipC. Bautista S.
Maveyraud-Tricoire

• Safety and efficiency of the financial system
• August 27th 2007
• Manila, Philippines

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Summary

• Capital flows and the financial crisis in South
  East Asia
• Empirical analysis of the saving-investment
  relation
• The saving-investment relationship in the
  framework the Markov-switching model
• Data and empirical results
• Concluding remarks

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Capital flows and the financial crisis in South
East Asia

• Financial sector profile

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Empirical analysis of the saving-investment

• The Feldstein-Horioka proposition
• In a closed economy, domestic investment and
  domestic saving are equal. One would therefore
  expect a perfect correlation between these two
  macroeconomic aggregates.
• In an open economy, with capital mobility,
  foreign saving could be tapped and investment is
  no longer constrained by domestic saving. Hence,
  the high correlation should no longer be expected
  to hold and domestic saving and investment need
  not travel the same paths
• The FH regression

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Empirical analysis of the saving-investment

• several studies that cover developing Asian
  countries mainly with panel data
• Isaksson (2001) 1975-1995 large coefficients
• Sinha (2002) 1950-1999 weak financial
  integration
• Kim et al. (2005) smaller values for 1980-1998
  period than for the 1960-1979 period
• Kim et al. (2006) 1980-2002 saving retention
  ratios weaker for Asian countries than for most
  OECD countries and decreasing over time
• Any empirical study on the impact of the Asian
  crisis on the saving-investment relationship

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The saving-investment relationship and the
Markov-switching model

• Benefits of using the markov switching model
• slope, intercept and the error variance allowed
  to change
• determines how and when shifts in the degree of
  capital mobility occurred
• Equation
• The binary variable m is assumed to represent
  either a high or low degree (or state) of capital
  mobility in an economy at date t.

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Data and results

• Data
• Countries Hong-Kong, Indonesia, South Korea,
  Malaysia, Philippines, Singapore and Thailand
• Data from the Penn World Table 6.2
• Covered period 1965 to 2004

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Data used in the study
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Estimation Results
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Smoothed Probability Low SR coefficient
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Smoothed Probability Low SR coefficient
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Concluding remarks and prospects

• The Asian financial crisis has an impact on the
  saving-investment relationship for most Asian
  countries weaker saving-investment correlations
  suggest that financial integration intensifies
  after the financial crisis.
• Economies with relatively stronger financial
  systems like Singapore appear to remain
  unaffected
• Prospects
• undertaking further research on the puzzling
  result low saving retention coefficients
  associated with current account surpluses