Interest And Exchange Rate Shocks On The Capital Market Risk And Capital Mobility: Evidence From Four Asian Countries

Abstract

This paper investigates how the thinness of foreign-exchange markets causes destabilizing speculations. Using the vector-autoregression model, it is shown that in response to one-standard-deviation shock to interest and exchange rates, the dynamic capital mobility and capital market-risk have increased in the short run. During the crisis, the Asian crisis countries responded by increasing their interest rates and devaluing their currencies to stem capital flight. However, in an environment of protracted financial-sector reform and thin foreign-exchange markets, these standard policies did not stabilize the capital inflows into these countries and this can be attributable to the very thin foreign-exchange markets of these Asian countries.