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National, regional and international capital markets: Measurement and implications for domestic financial fragility

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  • Menzie Chinn

    (University of California at Santa Cruz)

  • Michael Dooley

Abstract

Interest rate based tests and savings-investment correlations disagree on the extent of capital mobility in Pacific Rim economies. The apparent success of several East Asian countries in sterilizing capital inflows has also fueled the controversy. This paper argues that previous studies examining money market rates may be misplacing their focus, since most lending is mediated through (sometimes regulated) banking systems. We forward a simple open-economy macro model, incorporating bank credit. Several predictions of the model are tested. Capital inflows are found to affect bank lending, in certain cases. Rapid expansion of bank lending in the previous two years is also associated with increases in the bank lending-interest rate spread, a proxy for risk. Finally, we assess whether bank lending is an important variable in determining changes in economic activity, specifically investment. The data suggest that the link between money and investment is weaker than the corresponding link involving bank credit.

Suggested Citation

  • Menzie Chinn & Michael Dooley, 1995. "National, regional and international capital markets: Measurement and implications for domestic financial fragility," International Finance 9508006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:9508006
    Note: Korearv.wp International Finance, KOREARV.AUX has wp 5.1 graphs.
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    References listed on IDEAS

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    Cited by:

    1. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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