Conference on the Subprime Mortgage Crisis, Managing Capital Flows, and the Asian Economy

Purpose

This seminar will discuss the current macroeconomic conditions and policy options in Asia under the influences of global supply and demand turbulences. Current developments in the United States (US) economy and energy and food price hikes raise the question whether Asia’s economic growth can continue in a period when the US economy enters into a prolonged stagnation and the rest of the world feels the effects of the subprime mortgage crisis. The full impact of these two global shocks on the region must be assessed so that authorities can formulate appropriate national and regional policy responses and find ways to enhance the effectiveness of existing regional cooperation mechanisms to make Asian economies resilient to global shocks. This conference will also discuss financial supervision and regulation in the region as related issues. This seminar will first analyze the economic impacts of the US subprime crisis in Asia and suggest policy options. In addition, it will analyze regional cooperation options that will solve the negative effects of increasing capital inflows in Asia.

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Background

Asian economies now face the biggest challenges in macroeconomic policy options after the Asian crisis. For the last 10 years, capital flows into Asia tended to induce exchange rate appreciation that undermined export price competitiveness. Authorities in the region intervened in foreign exchange markets to maintain export price competitiveness. As a result of the sterilization policy pursued by authorities, money supply increased, feeding into inflation which has started to rise in recent months. Raising domestic interest rates to dampen inflationary pressure can induce more capital inflows into the region. This is a kind of vicious cycle. On the other hand, it is highly likely that due to external shocks, capital reversals can happen quickly, which could lead to a financial crisis. The US subprime loan crisis may bring about a liquidity squeeze in the region, causing credit crunches and reversal in capital flows, particular short-term portfolio flows. All this could put Asia’s financial system under stress. Thus, volatility in capital flows can pose difficulties for macroeconomic management.

At the same time, the current slowdown of the US economy and food and energy price hikes can affect capital flows and economic growth in the region. The current debate on the effects of the slowdown of the US economy on Asia lie on two different views on international linkages and spill-over: decoupling vs coupling views. Whether Asia can be decoupled from the US recession is important for policy makers to alleviate the negative demand shocks in the region. Energy and food price hikes also produce macroeconomic policy difficulties in the region since Asia’s developing economies depend much more on primary products than developed economies. This conference will discuss and assess current policy options in Asia related to capital flows, global recession, and oil and food price hikes.

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Outputs

ADBI discussion papers and conference proceedings.

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Participants

Participants will come from the members of Forum on East Asian Monetary Cooperation; representatives from think tanks and regional offices of multilateral institutions; journalists; and the private sector.

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Language

English

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Partners

Forum on East Asian Monetary Cooperation