Monetary policy in Asia, an export-dependent region, has made a valiant effort since 2002 to suppress appreciation in the real, or inflation-adjusted, exchange rate as capital inflows grew. Gross capital inflows into Asia – China, India, Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Thailand, Vietnam, Pakistan and the Philippines – have now risen back to the record highs recorded before the financial crisis of 1997. Limiting foreign capital to more manageable levels requires a reduction in Asian interest rates, something that is not possible any time soon because of inflation. Roberto Cardarelli and other IMF economists have investigated 109 episodes of large capital inflows into emerging markets since 1987 to see what policy response works, and more importantly, what does not. Much of what Asian central banks have done to cope with capital inflows since they began building up in 2002 is quite useless. The Philippine peso traded near its highest level in seven years Monday as Filipinos working overseas sent money home, increasing demand for the currency as the foreign currency is converted. read more
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