Financial stress in the ASEAN-5 economies: Macro-financial vulnerabilities and the role of monetary policy / Tng Boon Hwa
Using Indonesia, Malaysia, the Philippines, Singapore and Thailand (ASEAN-5) as sample countries, this thesis contributes to the empirical analyses of three gaps in existing literature. The initial analysis addresses a knowledge gap in the measurement of financial stability. Existing measures of fi...
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Format: | Thesis |
Published: |
2017
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Online Access: | http://studentsrepo.um.edu.my/7230/2/All.pdf http://studentsrepo.um.edu.my/7230/6/boon_hwa.pdf http://studentsrepo.um.edu.my/7230/ |
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Summary: | Using Indonesia, Malaysia, the Philippines, Singapore and Thailand (ASEAN-5) as sample countries, this thesis contributes to the empirical analyses of three gaps in existing literature. The initial analysis addresses a knowledge gap in the measurement of financial
stability. Existing measures of financial stability could not simultaneously: (1) reflect stability at a systemic scale; (2) reflect stability with little lag, and (3) incorporate information on the financial structure of the economy. Financial Stress Indices (FSI) are
constructed to address these deficiencies. The FSIs are constructed using indicators of
stress and weighted using the liability side of the financial structure of the sample
economies. The indicators and weights of the FSIs span four major market segments - the
equity market, banking system, domestic bond market and foreign finance market. Using
data from 1997-2013, the results reveal three periods of higher financial stress. The most
severe episode in terms of magnitude and duration was the Asian Financial Crisis (1997-
1998). This is followed by the US technology bubble burst (tech bust) (2000-2001) and
the recent Global Financial Crisis (GFC) (2007-2009). Interestingly, higher stress levels
were seen during the tech bust compared to the GFC in all countries, except Singapore.
The FSIs are subsequently modelled as a panel model to investigate the sources of
financial stress in the ASEAN-5 economies. The methodology and model specification
extends from the Early Warning System (EWS) literature by: (1) including more external
variables to better capture the open-economy aspect; (2) including a measure of regional
financial contagion; (3) analysing the entire financial cycle instead of just crisis periods,
and; (4) using an instrumental variable approach to address endogeneity concerns. The
results show that: US financial stress and regional financial contagion are significant
common determinants. For country-specific variables, only bank credit emerged as
consistently significant. A positive bank credit gap portends higher financial stress.
Analysis of the sources of financial stress within individual markets reveals the importance of the banking system and equity markets for financial stress elsewhere.
Country-specific Structural Vector Autoregression (SVAR) models for each ASEAN-5
economy are then estimated to analyse the impact of financial stress on the economy and
the relationship between monetary policy and financial stress. The SVAR models are
adapted to be suited for small-open economies, by including more external variables and
in the model structure, where the external variables affect the domestic variables, but not
vice versa. The models incorporate FSIs to reflect financial stress in the global
environment and ASEAN-5 economies. The findings show that higher financial stress
leads to tighter domestic credit conditions and lower economic activity in all five
countries. The impact on the real economy displays an initial rapid decline followed by a
gradual dissipation. In Malaysia, the Philippines and Thailand, the central banks reduce
policy interest rates (IRs) when financial stress increases, although there is substantial
cross-country variation in the magnitude and time dynamics. Lower policy IRs are found
to have little significant effects in lowering financial stress, but are still effective in
stimulating economic activity through other channels. |
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