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International Monetary Fund. Asia and Pacific Dept
Published Date:
November 2008
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    Note: The main authors of this chapter are Kenneth Kang, Romuald Semblat, Olaf Unteroberdoerster, and Harm Zebregs. Xiangming Fang provided research assistance.

    See “Sterilized Intervention in Emerging Asia: Is It Effective?” Regional Economic Outlook: Asia and Pacific, October 2007.

    According to the Japan Financial Services Agency, as of June 2008, Japanese deposit-taking institutions are estimated to hold around US$135 billion in overseas securitized products (28 percent of tier 1 capital), of which only US$9 billion are subprime, and the rest in the form of various collateralized loan and debt instruments and leveraged loans. According to the Korea Financial Supervisory Service, Korean bank investments in mortgage-related securities—mortgage-backed securities and collateralized debt obligations—are estimated at about US$70 million, while exposure to Fannie Mae and Freddie Mac bonds is estimated at about US$120 million.

    See the October 2008 Global Financial Stability Report for a geographic breakdown of the $760 billion in reported writedowns globally through September 2008.

    Since 2005, the terms of trade are estimated to have deteriorated by close to 25 percent for Japan and the Philippines, and by around 17 percent for Korea and Taiwan Province of China.

    Global factors have thus played an important role in recent inflation trends, with the correlation with inflation in other regions having increased substantially since 2000. Chapter 2 of this Regional Economic Outlook examines the issue of globalization of Asian inflation and finds that a substantial portion of inflation in Asia over the past 10 years has been imported largely through commodity prices and that this share has been rising. Rising commodity prices have meant not only higher, but also more volatile, inflation, with the standard deviation of inflation increasing by around 20 percent during 2005–2008 compared to five years ago.

    The fan chart and associated risk factors in the two figures are constructed from a survey of the IMF’s Asia and Pacific Department country economists on the risks to their baseline forecast, where each response is then weighted by the country’s purchasing power parity weight in the region’s GDP.

    According to the IMF Global Economy Model, a protracted slowdown of 1 percentage point in the United States combined with continued financial stress that affects confidence globally would reduce growth in emerging Asia by 0.8 percentage point (“Can Asia Decouple?” Regional Economic Outlook: Asia and Pacific, April 2008).

    For example, quarterly publication by the Japanese Financial Services Agency of deposit-taking institutions’ holdings of subprime and other structured products has helped to allay market concerns regarding the size of these exposures in relation to banks’ capital positions.

    Note: The main authors of this chapter are Carol Baker, Souvik Gupta, Jacques Miniane, and Francis Vitek.

    Moreover, in some cases the shocks to food prices can be domestic, as in the pig epidemic in China.

    This categorization of imported and domestic inflation has important limitations, such as the assumption of complete pass-through of import prices in domestic currency to retail prices. This assumption may not be a good approximation in some countries, such as Japan. It should also be noted that “imported inflation” need not mean “exogenous inflation” in this categorization. One example of this difference could be energy prices, which here enter through imported inflation yet may be affected by trends in Asia, as discussed later.

    The contribution from imported inflation has also risen sharply in the United States over this period, particularly in the most recent quarters. The appreciation of the euro has also helped dampen import prices in the euro area over this period.

    In China, as in countries like Malaysia or Indonesia, direct and indirect subsidies have limited the impact of imported inflation.

    See the appendix to this chapter for details on our estimated model.

    Related work also finds a large permanent component in surging oil prices; see Arbatli (2008). Needless to say, all such estimates should be interpreted with a good deal of caution, given difficulties in, inter alia, separating trend and cyclical components in commodity markets or accounting for nonlinearities in prices when spare capacity is low or financial markets are under heavy stress.

    See IMF (2008a) for more details.

    In the current exceptional circumstances, some cental banks may be primarily concerned with containing systemic financial risk.

    Regarding the estimated trade-off in individual countries, note that the trade-off depends on a variety of country factors, such as the share of imported goods in consumption, the exchange rate regime, and the credibility of monetary policy.

    Note: The main authors of this chapter are Leif Eskesen, Erik Lueth, and Murtaza Syed. Kay Chung and Fritz Pierre-Louis provided research assistance.

    In this chapter, Asia refers to the following 13 economies: Australia, New Zealand, Japan, China, India, Hong Kong SAR, Korea, and Singapore (NIEs excluding Taiwan Province of China) and Indonesia, Malaysia, the Philippines, Thailand, and Vietnam (ASEAN-5).

    There is some uncertainty surrounding long-term population projections, which are sensitive to different assumptions about fertility, mortality, and participation rates. The analysis presented in this chapter is based on UN population data (2006 revision, medium variant).

    Extensions of the basic hypothesis that take into account liquidity constraints, precautionary saving, and preferences for leaving bequests imply a less sharp decline in saving during retirement.

    This requires that capital be able to flow freely across borders, while labor is relatively immobile. If labor were more mobile than capital, immigration would arbitrage away most of the international return differentials.

    Further details on the empirical approaches and data are provided in the appendix.

    The applied trading partner weights account for intertemporal changes in trade patterns.

    These include trend and cyclical components of growth, long-term interest rates, and inflation dynamics (see Davis and Li, 2003).

    These demographic variables are similar to those used in Yoo (1994) and Davis and Li (2003) to capture age-dependent demand for financial assets. Unlike in the previous section, the case for scaling these relative to trading partners is less compelling, with domestic factors likely to be preeminent during the sample period considered, as reflected in persistent home bias and far from complete capital account liberalization.

    In the case of stocks, returns reflect both changes in prices and dividend payments as well.

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