## _cr16176 ## Source details **Canonical URL:** [_cr16176](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16176.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16176.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16176.pdf.json) --- ### Executive summary — evolution of monetary policy frameworks - Monetary policy frameworks of the ASEAN-5 have on the whole performed well since the AFC, delivering both price and financial stability. - Post-AFC adoption of explicit or implicit inflation targeting frameworks served the ASEAN-5 but faced new challenges during the GFC and the period of UMPs in AEs. - Greater exchange rate flexibility strengthened monetary policy autonomy; however: - Open capital accounts and the global financial cycle made domestic financial conditions highly susceptible to global financial factors. - ASEAN-5 policy rates were pushed down beyond what can be attributed to usual central bank responses, particularly during the UMP period. - Policy toolkit broadened to include macroprudential policies (MPPs), capital flow management measures (CFMs), and FX intervention. - Reserve buffers: - Built up during the great moderation and UMP period; drawn down in some cases close to the lower bound of the Fund’s reserve adequacy metric range. - Several countries continued to maintain reserves above the range at significant quasi-fiscal costs. - Outlook: - Normalization of monetary policies in center economies should permit greater monetary policy independence in the ASEAN-5. - Further evolution expected in response to rising leverage, dwindling policy buffers, volatile capital flows, asynchronous AE policies, and deeper cross-border financial integration (including ASEAN Economic Community’s goal of financial liberalization and freer capital flows within ASEAN by 2025). ### Global financial cycle and spillovers - A global financial cycle emanating from changes in U.S. monetary policy and global risk aversion drives domestic financial conditions in the ASEAN-5. - Empirical findings: - “Center economy” monetary policy transmits to domestic short- and long-term market interest rates and retail bank rates. - Policy rates and active liquidity management remained effective in influencing retail bank rates and the yield curve despite spillovers. - Loose global liquidity during the great moderation and UMP period increased risks of boom-and-bust cycles of credit and asset prices. - Two principal transmission channels identified via principal component analysis: - A component associated with the U.S. 10-year treasury bond (long-term yields, retail bank rates, bank credit). - A component associated with the VIX (short-term market rates, exchange rate, stock market indicators). - First two common components explain about 60‒75 percent of variation of domestic financial conditions in ASEAN-5 (exception: Singapore where the first principal component explains most variation). ### Exchange rate flexibility, behavior, and volatility - De jure and de facto regime classifications: - AREAER classification: all five classified as de jure managed or free floaters since 2008. - De facto (2014): four economies classified as managed floaters; none as free floaters. - Singapore: AREAER (2014) classifies Singapore’s monetary policy framework as an exchange rate anchor. - Stationarity and cointegration tests: - Pre-AFC: hypothesis of no unit root rejected at 5 percent significance level for a number of ASEAN-5 countries against the U.S. dollar. - Between AFC and GFC: unit root test picks up the ringgit quasi peg to the U.S. dollar until 2005. - Post-GFC: ASEAN-5 currencies remained non-stationary against the U.S. dollar, the yen, and the renminbi. - Cointegration tests broadly confirm unit root results; no tight “club” or peg to a single reserve currency. - Exchange rate volatility (Coefficient of Variation — 10-day / 50-day / 250-day; aggregate figures listed exactly): - ASEAN-5 aggregate: 0.10 / 1.33 / 0.50 / 0.31 / 4.17 / 1.27 / 1.14 / 5.78 / 4.04 - Indonesia: 0.10 / 1.33 / 0.50 / 0.31 / 4.17 / 1.27 / 1.14 / 5.78 / 4.04 - Malaysia: 0.23 / 0.62 / 0.54 / 0.61 / 1.77 / 1.25 / 1.76 / 3.79 / 2.89 - Philippines: 0.24 / 0.75 / 0.39 / 0.78 / 1.87 / 0.88 / 3.09 / 5.60 / 1.91 - Singapore: 0.24 / 0.73 / 0.39 / 0.60 / 1.90 / 0.90 / 1.69 / 3.28 / 2.23 - Thailand: 0.18 / 0.43 / 0.33 / 0.40 / 1.01 / 0.87 / 0.79 / 4.34 / 2.15 - For comparison — Australia: 0.51 / 2.45 / 0.85 / 1.14 / 5.91 / 1.97 / 2.55 / 11.69 / 5.43; New Zealand: 0.42 / 2.20 / 0.92 / 0.95 / 5.09 / 2.08 / 2.44 / 10.76 / 5.07; Japan: 0.71 / 1.28 / 0.67 / 1.73 / 2.75 / 1.51 / 4.55 / 4.63 / 4.08 - Authorities smooth short-term volatility but allow significant movements over longer periods; no statistically significant evidence of targeting a level of the nominal and/or real effective exchange rate. ### Interest-rate transmission and spillovers to sovereign yields and retail rates - Sovereign yields (EGARCH (1,1) model, 2000–2015): - A decline in the shadow federal funds rate reduces long-term government bond yields in all ASEAN-5 economies. - An increase in U.S. term premium raises long-term bond yields in all ASEAN-5 economies. - The rise in shadow federal funds rate and U.S. term premium could have greater impact on Indonesia and the Philippines. - Global risk aversion (VIX) increases yields in Indonesia and the Philippines but lowers yields in Thailand. - Robust fundamentals (stronger current account balances, lower public debt) tend to lower bond yields. - Expectations of currency depreciation can drive bond yields higher; better growth expectations often result in lower bond yields. - Retail bank rates (Ricci and Shi approach): - Global financial factors significantly affect bank behavior in ASEAN-5 economies except possibly Thailand. - Domestic policy rate and liquidity conditions matter, highlighting the role of domestic monetary policy and liquidity management. - Principal component / global factor evidence supports foreign portfolio flows as a key spillover channel given high foreign participation in sovereign markets. ### Monetary policy rules, global factors, and active operational frameworks - Taylor-rule ("thick modeling") results: - Models fit very well: R-squared generally above 80 percent and frequently in excess of 90 percent. - Lagged dependent variable coefficients: 0.6 in Malaysia; close to 1.0 in the Philippines. - Expected inflation coefficients exceed those on inflation or core inflation in most countries. - Thailand: inflation reaction coefficients in excess of 1 for core or expected inflation. - Malaysia: least responsive to inflation; non-inflation targeter in the group. - Output gap generally insignificant except in Malaysia (negative output gap of 1 percentage point → 25 basis point reduction in policy rate). - Exchange rate coefficients aggregate insignificant. - Global crisis dummy (Q4:2008–Q2:2009) significant with large negative sign: range of additional reductions between 30 bps for Malaysia and 75 bps for Indonesia. - VIX: a 30 point increase associated with a decline in policy rates of 10‒45 bps. - U.S. shadow short rate exerted significant downward pressure on ASEAN-5 policy rates; impact smaller in Malaysia and Singapore; U.S. monetary policy put downward pressure on ASEAN-5 policy rates—lower by as much as 2.5 percentage points in Indonesia (with impacts narrowing more recently). - Active operational frameworks: - Aligning market conditions with announced policy stance supports effective policy rate transmission. - Exceptions: Philippines (short-term money market rates much lower than policy corridor during 2009–2011); Indonesia (overnight interbank rate effectively at bottom of corridor). - Continued significance of policy rates and liquidity conditions underscores importance of active liquidity management. ### Gross capital flows, reserves, sterilization, and costs - Gross capital flows and reserves: - Gross capital outflows have smoothed adjustment to the global financial cycle while reserves acted as a buffer. - Reserve accumulation during 2002‒2007 and 2009‒2011; drawdowns during 2008‒2009 and 2013‒2015. - Since 2013 gross capital inflows moderated; ASEAN-5 reduced pace of reserve accumulation or deccumulated. - Reserve buffers drawn down in some cases close to lower bound of the Fund’s reserve adequacy metric range (Indonesia and Malaysia); Philippines and Thailand maintained reserves above the range. - Sterilization coefficients (average using one-month extended window; β=-1 full sterilization): - Indonesia: -0.957 (Pre-GFC), -0.901 (GFC), -0.838 (Post-GFC), -0.824 (Taper Tantrum) - Malaysia: -0.933 (Pre-GFC), -0.914 (GFC), -0.871 (Post-GFC), -0.839 (Taper Tantrum) - Philippines: -0.806 (Pre-GFC), -0.709 (GFC), -0.765 (Post-GFC), -0.833 (Taper Tantrum) - Singapore: -0.989 (Pre-GFC), -0.981 (GFC), -1.000 (Post-GFC), -1.004 (Taper Tantrum) - Thailand: -1.000 (Pre-GFC), -1.000 (GFC), -1.000 (Post-GFC), -1.000 (Taper Tantrum) - Costs of FX intervention — average ex-ante total costs (percent of GDP): - Indonesia: 0.6 percent of GDP - Philippines: 0.7 percent of GDP - Thailand: 0.9 percent of GDP - Malaysia: 1.0 percent of GDP - Singapore: 1.3 percent of GDP - Median EME total cost: 0.5 percent of GDP - Conclusion: Total costs of FX reserve buffers for ASEAN-5 are in line with a broad sample, albeit slightly on the high side. ### Capital inflows, credit booms, sectoral vulnerabilities, and policy tools - Capital inflows can serve investment needs but short-term portfolio flows need careful management to avoid macroeconomic and financial stability risks. - Channels of risk: (i) increases in short-term wholesale funding of banking system; (ii) increases in foreign currency funding; (iii) contributions to local credit booms and asset price appreciation; (iv) credit risks from foreign currency denominated loans. - Credit booms evidence (three methodologies): - Mendoza & Terrones; Dell’Ariccia et al.; IMF GFSR thresholds. - All three identify credit booms prior to the AFC in all ASEAN-5 economies. - Except for Singapore, evidence for credit booms in run up to the GFC or thereafter is limited. - Sectoral imbalances: - Household debt increased rapidly in Malaysia and Thailand, with household debt-to-GDP ratios "now standing above 80 percent of GDP in both economies." - Singapore and Thailand had "more than 80 percent corporate debt-to-GDP ratios as of end-2014." - Corporate leverage rose during the UMP period but appears manageable at aggregate level; pockets of vulnerability remain. - Macroprudential and CFM usage: - MPPs increasingly used, especially housing-related measures. - Indonesia: housing loan growth slowed from "32 percent y/y in Q3:2013 to 12 percent in Q3:2014" after tightening LTVs; house price inflation slowed from "13.5 percent in Q3:2013 to 6.5 percent in Q3:2014." - Malaysia and Thailand: countercyclical tightening/loosening of MPPs linked to housing cycles. - Singapore: progressive housing-related measures and a sharp fall in housing loans and prices; additional buyer's stamp duty considered both a MPP and a CFM. - Philippines: no formal MPPs for real estate loan growth but enhanced monitoring and stress testing; moral suasion and enhanced supervision may have slowed house price appreciation and loan growth. - CFMs mostly limited to reserve requirements on FX deposits; Indonesia and Thailand used restrictions on bond holding periods or withholding tax for foreigners. - Philippines imposed a higher differential capital charge on domestic and foreign banks’ NDF exposures, significantly reducing NDF positions of onshore banks. ### Policy responses to capital outflow episodes and empirical facts - Tools deployed: policy interest rates, FX intervention, liquidity management, reserve requirement changes, MPPs, CFMs, deposit insurance expansion, fiscal measures. - Episode highlights: - Cumulative non-FDI outflows during 2008:Q3–2009:Q1 exceeded US$90 billion. - Cumulative net portfolio outflows between June 2013 and March 2014 reached almost US$20 billion (EPFR data); comparison: US$8 billion outflows during September 2008–March 2009. - Equity markets: stock prices fell more than 30 percent on average between September 2008 and March 2009. - Taper tantrum (June–August 2013): equity declines greatest in Indonesia, the Philippines, and Thailand (15 percent on average); Malaysia and Singapore ~5 percent. - Between August and September 2015: Indonesia and Singapore experienced a 12 percent drop; Malaysia, the Philippines, and Thailand fell by 6‒9 percent. - Sovereign CDS spreads surged between September 2008 and February 2009: about 90 bps (Singapore) to nearly 400 bps (Indonesia). - Indonesia: rise of 124 bps in sovereign spreads and 250 bps in government bond yields between May and September 2013. - 2015 summer turbulence: Indonesia’s yields and CDS widened by more than 100 basis points; Malaysia’s sovereign CDS spreads increased by about 100 basis points. - Exchange rate depreciation and reserves: rupiah and ringgit lost 29 percent of their values against the U.S. dollar between April 2013 and December 2015; Malaysia’s FX reserves declined by 32 percent over the same period. - Country responses varied (selected): - During taper tantrum Indonesia tightened reserve requirements and LTVs, later allowed exchange rate and long-term yields to move, and tightened fiscal policy with "an average 33 percent increase in subsidized fuel prices." - Summer 2015: reserves drawdowns most pronounced in Indonesia and Malaysia; ASEAN-5 relied more on currency depreciation than reserves changes in 2013–15 compared to previous episodes. ### FX intervention objectives, constraints, and policy trade-offs - Objectives: mitigate capital flow shocks; counter potentially disorderly market conditions; prevent exchange rate from amplifying shocks through balance-sheet effects. - Justification: intervention warranted when volatility/overshooting amplifies adverse shocks, not merely when volatility deviates from fundamentals. - Risks: excessive intervention can undermine monetary policy clarity and credibility; must ensure consistency of overall policy mix. - Mitigating measures: good communication and enhanced transparency to clarify FX intervention objectives. - Analytical work: impact of adding FX intervention to Taylor-rule functions explored in Ding and Peiris (forthcoming). ### Lessons, policy implications, and future directions - Price stability alone is insufficient; central banks and regulators must monitor liquidity, credit conditions, and balance-sheet strength across banks, corporates, and households. - Flexible exchange rates combined with strengthened surveillance and stricter microprudential policies contributed to resilience during global shocks. - Continued emphasis on transparency, communication, and coherent forward-looking frameworks enhances effectiveness and accountability. - With deepening financial integration and asynchronous AE policies, frameworks will need further refinements: greater use of MPPs, CFMs, reserve management, and possibly more countercyclical measures. - Risks to monitor: reserve buffers falling below critical levels; generalized credit and asset price booms; high household and corporate leverage; divergence between asset price and inflation cycles; ASEAN Economic Community’s financial liberalization by 2025 posing cross-border challenges. ### Key country-level figures (selected exact values) - Medium-term inflation objectives: - Indonesia: Government approved inflation target 2013‒2015: 4.0% ±1 percentage point (ppt). - Malaysia: Comfort level of about 3%. - Philippines: Government approved inflation target 2015‒2018: 3.0% ±1 ppt; BSP inflation forecast 2015: below the range of 3.0% ± 1.0 ppt; 2016: low end of 3.0%±1.0 ppt; 2017: midpoint of 3.0%±1.0 ppt. - Singapore: Comfort level of about 2%. - Thailand: Government approved inflation target 2015: 2.5% ±1.5 ppt; BOT inflation forecast 2015: -0.9%; 2016: 1.2%. - Reserve requirement statutory ratios: - Indonesia: Primary RRR (7%) + secondary RRR on liquid assets (2.5%). - Malaysia: 3.5%, commercial banks. - Philippines: 20%, universal and commercial banks. - Singapore: 3%, all banks. - Thailand: 1%, commercial banks. - Reporting and transparency: - Inflation report frequency: Indonesia Monthly; Philippines Quarterly; Singapore Semi-annual; Thailand Quarterly; Malaysia Not available. - Public release of monetary policy stance: Same day for all five countries. - Minutes/highlights of monetary policy meetings: Indonesia Yes; Malaysia Not available; Philippines A month after meeting date; Singapore Not available; Thailand Two weeks after meeting date. - Accountability reporting varies by country (selected features listed exactly in source). *Source: IMF ASEAN-5 Cluster Report, Executive Summary (May 9, 2016).* ### EXECUTIVE SUMMARY _________________________________________________________________ 3 ### EXECUTIVE SUMMARY ### EVOLUTION OF MONETARY POLICY FRAMEWORKS - Monetary policy frameworks of the ASEAN-5 have on the whole performed well since the AFC (Asian financial crisis), delivering both price and financial stability during significant domestic and regional transformation and global macroeconomic and financial turmoil. - Post-AFC adoption of explicit or implicit inflation targeting frameworks served the ASEAN-5 economies well but faced new challenges during the GFC (global financial crisis) and the period of UMPs (unconventional monetary policies) in AEs (advanced economies). - Greater exchange rate flexibility strengthened monetary policy autonomy; however: - Open capital accounts and the global financial cycle made domestic financial conditions highly susceptible to global financial factors. - ASEAN-5 policy rates were pushed down beyond what can be attributed to usual central bank responses to domestic output and price developments, particularly during the UMP period. - The policy toolkit broadened to include: - Macroprudential policies (MPPs) to address systemic risks (sectoral leverage and asset price cycles). - Capital flow management measures (CFMs) and FX intervention to manage volatile capital flows. - Reserve buffers built up during the great moderation and UMP period were drawn down in some cases close to the lower bound of the Fund’s reserve adequacy metric range; several countries continued to maintain reserves above the range at significant quasi-fiscal costs. - Going forward: - Normalization of monetary policies in center economies should permit greater monetary policy independence in the ASEAN-5, even with reduced recourse to nontraditional tools. - Further evolution of frameworks can be expected in response to rising leverage, dwindling policy buffers, volatile capital flows, asynchronous AE policies, and deeper cross-border financial integration (including ASEAN Economic Community’s goal of financial liberalization and freer capital flows within ASEAN by 2025). - The ASEAN-5 central banks broadly agreed with the analyses and findings; all five central banks highlighted the shift to greater exchange rate flexibility, buildup in FX reserves, enhanced financial surveillance post-AFC, and spillovers from the global financial cycle. ### GLOBAL FINANCIAL CYCLE AND SPILLOVERS - The report documents a global financial cycle emanating from changes in U.S. monetary policy and global risk aversion that drives domestic financial conditions in the ASEAN-5. - Empirical assessment indicates: - Transmission of “center economy” monetary policy affects domestic short- and long-term market interest rates and retail bank rates in ASEAN-5 economies. - Policy rates and active liquidity management continued to be effective in influencing retail bank rates and the yield curve despite spillovers. - The generalized reduction in global interest rates and loose liquidity conditions during the great moderation and UMP period increased the risks of boom-and-bust cycles of credit and asset prices in the region. - Exchange rate behavior: - Greater exchange rate flexibility did not fully insulate economies from the global financial cycle when capital accounts are highly open. - De jure and de facto exchange rate classifications and movements against the U.S. dollar are analyzed (figures and tables enumerated in the report). ### POLICY RESPONSES - Monetary policy: - ASEAN-5 central banks refined frameworks and broadened toolkits to strengthen policy autonomy and mitigate financial stability risks. - Comparison against estimated Taylor rule reaction functions shows primary monetary instruments were compared to country-specific rules including weights on goals other than inflation. - Use of macroprudential policies and CFMs: - MPPs were increasingly relied upon to address systemic risks, particularly sectoral leverage and asset price cycles. - CFMs and FX intervention were used to manage volatile capital flows, overlapping with MPPs at times to address systemic risks. - FX intervention responded to potentially disruptive volatile capital flows and market conditions. - The move to more flexible exchange rate regimes aligned with Fund policy advice in Article IV consultations, and along with stricter microprudential policies, helped avoid a buildup of short-term foreign currency debt and allowed the exchange rate to act as a shock absorber during the GFC and post-taper tantrum episodes. - Sterilization, reserve management, and the cost of FX intervention are documented (tables and figures provide sterilization coefficients and average total cost of FX intervention, 2002–13). ### POLICY RESPONSES TO CAPITAL OUTFLOW EPISODES - The report reviews policy responses to major episodes: the GFC, the Taper Tantrum, and Renminbi adjustment. - During episodes of capital outflows: - Policy interest rates, FX intervention, and liquidity management were deployed. - Some countries drew down reserves—sometimes near the lower bound of the Fund’s reserve adequacy metric range—while others maintained higher reserves at significant quasi-fiscal cost. - The ASEAN-5 avoided broad-based credit booms and used targeted MPPs to address sectoral leverage and asset price cycles; heat-map evidence on credit booms and the credit intensity of output are included in the analysis. ### LESSONS FROM EVOLUTION OF MONETARY POLICY FRAMEWORKS - Maintaining price stability alone is insufficient to secure macroeconomic stability because of macrofinancial linkages; it is essential for central banks and financial regulators to monitor and manage liquidity and credit conditions and balance-sheet strength of banks, corporates, and households. - A flexible exchange rate combined with strengthened financial surveillance and stricter microprudential policies contributed to resilience during global shocks. - Continued emphasis on transparency, communication, and coherent forward-looking frameworks (goals, instruments, strategy, operating targets, procedures) enhances policy effectiveness and accountability. - As ASEAN-5 economies deepen financial integration and face asynchronous AE monetary policies, further refinements to frameworks, including MPPs, CFMs, and reserve management, will be necessary to safeguard macroeconomic and financial stability. *Source: IMF ASEAN-5 Cluster Report, Executive Summary (May 9, 2016).* ### 5. The move towards greater exchange rate flexibility has supported the transition to a ### _cr16176 - 5. The move towards greater exchange rate flexibility has supported the transition to a ### Exchange rate flexibility and regime classification - AREAER classification indicates the ASEAN-5 economies have moved toward greater exchange rate flexibility, with all five classified as de jure managed or free floaters since 2008 (Figure 4). - De facto classification is less flexible: in 2014 four economies were classified as managed floaters and none classified as free floaters. - Singapore is an exception: AREAER (2014) classifies Singapore’s monetary policy framework as an exchange rate anchor, although the MAS is ultimately targeting price stability (inflation) as main monetary policy objective. - Observation: the gradual move to floating regimes and continued exchange rate considerations during crises mirrors experiences in many advanced and emerging market economies (IMF 2015b). ### Exchange rate behavior in ASEAN-5: co-movements and stationarity tests - No consistent pattern across ASEAN-5 exchange rates; broad co-movements occur among subsets over certain periods but magnitudes and turning points differ across countries. - Little evidence that ASEAN-5 currencies form a tight “club” or peg to a single reserve currency or basket. - Unit root tests (against the U.S. dollar, the yen, the renminbi, and against each other) were used to assess fixity (Klyuev and Dao, forthcoming). - Results by period: - Pre-AFC: hypothesis of no unit root rejected at 5 percent significance level for a number of ASEAN-5 countries against the U.S. dollar — consistent with quasi-dollar-pegs before the AFC (Jeasakul and others 2014). - Between AFC and GFC: unit root test picks up the ringgit quasi peg to the U.S. dollar until 2005. - Post-GFC: ASEAN-5 currencies remained non-stationary against the U.S. dollar, the yen, and the renminbi, indicating absence of a tight relationship with the U.S. dollar or any other major currency. - Cointegration tests broadly confirm unit root results and do not show additional statistical relationships among exchange rates. ### Exchange rate volatility, FX intervention, and anchor testing - ASEAN-5 central banks appear to smooth short-term currency volatility, particularly against the U.S. dollar. - Variability of ASEAN-5 exchange rates against the U.S. dollar increases with the time horizon (see Table 1, and Figure 6). - Authorities likely dampen day-to-day excessive exchange rate volatility but allow significant movements over longer periods vis-à-vis major currencies (Klyuev and Dao, forthcoming). - Time series analyses provide no statistically significant evidence of targeting a level of the nominal and/or real effective exchange rate or of specific anchor currencies. - Multiple regression analysis (Frankel and Wei, 1994) findings: - Prior to the AFC, ASEAN-5 currency movements against third currencies largely followed those of the U.S. dollar. - Singapore dollar was more closely linked to a basket of currencies (U.S. dollar dominant, with significant yen and euro weights). - Post-AFC developments: - Indonesian rupiah became considerably more volatile. - Malaysian ringgit was pegged to the U.S. dollar until 2005; volatility increased after peg was broken. - Thailand’s baht shifted some weight to the yen but the dollar remained the most significant anchor; degree of flexibility increased slightly. - Philippine peso broadly appreciated against a combination of the U.S. dollar and the yen post-AFC but showed greater volatility. - After the GFC only a slight increase in ASEAN-5 exchange rate volatility against the U.S. dollar is observed compared to the pre-GFC period, suggesting increased FX intervention to counter global volatility associated with unconventional monetary policies in advanced economies. - Note: Empirical distinction between smoothing against the renminbi and against the dollar is difficult given very limited daily movements of the RMB/US$ rate; over longer horizons ASEAN-5 currencies varied considerably vis-à-vis both anchors. ### Exchange rate volatility—Coefficient of Variation (Table 1 data) - Time periods: Pre-AFC (1991-June 1997); GFC (September 2008-February 2009); and Post-GFC (March 2009 to latest data). - Coefficient of Variation (10-day / 50-day / 250-day) for selected economies: - ASEAN-5 aggregate: 0.10 / 1.33 / 0.50 / 0.31 / 4.17 / 1.27 / 1.14 / 5.78 / 4.04 - Indonesia: 0.10 / 1.33 / 0.50 / 0.31 / 4.17 / 1.27 / 1.14 / 5.78 / 4.04 - Malaysia: 0.23 / 0.62 / 0.54 / 0.61 / 1.77 / 1.25 / 1.76 / 3.79 / 2.89 - Philippines: 0.24 / 0.75 / 0.39 / 0.78 / 1.87 / 0.88 / 3.09 / 5.60 / 1.91 - Singapore: 0.24 / 0.73 / 0.39 / 0.60 / 1.90 / 0.90 / 1.69 / 3.28 / 2.23 - Thailand: 0.18 / 0.43 / 0.33 / 0.40 / 1.01 / 0.87 / 0.79 / 4.34 / 2.15 - Other Asian free-floaters (for comparison): - Australia: 0.51 / 2.45 / 0.85 / 1.14 / 5.91 / 1.97 / 2.55 / 11.69 / 5.43 - New Zealand: 0.42 / 2.20 / 0.92 / 0.95 / 5.09 / 2.08 / 2.44 / 10.76 / 5.07 - Japan: 0.71 / 1.28 / 0.67 / 1.73 / 2.75 / 1.51 / 4.55 / 4.63 / 4.08 ### Global financial cycle and domestic financial conditions - Global financial cycles and volatility spillovers are key challenges for ASEAN-5. - Key literature and mechanisms: - Eichengreen and Gupta (2014): severity of tapering impact linked to prior capital inflows. - Rey (2013): global financial cycle in capital flows, asset prices, credit growth; cycle proxied by VIX and mainly driven by U.S. monetary policy. - Potential risks: surprises from U.S. interest rate normalization and spikes in global risk aversion could trigger capital outflows and tightening domestic financial conditions, with significant macrofinancial effects. - Quantifying impacts and transmission channels is important for monetary policy and shock amplification assessment. ### Principal component analysis of domestic financial conditions - Approach follows Miranda-Agrippino and Rey (2012): principal component model to identify global factors explaining variability of domestic financial indicators. - First two common components explain about 60‒75 percent of variation of domestic financial conditions in ASEAN-5 (exception: Singapore where the first principal component explains most variation). - Typical associations: - One principal component associated with the U.S. 10-year treasury bond—closely related to long-term bond yields, retail bank interest rates, bank credit, corporate indicators. - The other component associated with the VIX—correlated with short-term market rates, exchange rate, stock market indicators. - Two key macrofinancial transmission channels for global shocks in ASEAN-5: - Channel related to the VIX and global financial cycle impacting capital flows and asset prices (Blanchard and others 2015). - Channel linked to U.S. interest rates affecting monetary and credit conditions. ### Interest rate spillovers: sovereign yields, retail rates, and channels - Focus on how “center economy” monetary policies transmit to domestic long-term sovereign bond yields, affecting corporate bond pricing and household mortgages; and spillovers to domestic retail bank rates. - Domestic long-term market interest rates: - Method: EGARCH (1,1) model of sovereign bond yields (2000–2015) using macrofinancial variables including global factors (Peiris 2013). - Findings: - A decline in the shadow federal funds rate reduces long-term government bond yields in all ASEAN-5 economies. - An increase in U.S. term premium raises long-term bond yields in all ASEAN-5 economies. - The rise in shadow federal funds rate and U.S. term premium could have greater impact on Indonesia and the Philippines. - Global risk aversion (VIX) has mixed effects: increases yields in Indonesia and the Philippines but lowers yields in Thailand (likely reflecting Thai financial institutions’ home bias). - Robust fundamentals (stronger current account balances, lower public debt) tend to lower bond yields. - Expectations of currency depreciation can drive bond yields higher. - Better growth expectations often result in lower bond yields, suggesting investors view better growth as improved creditworthiness. - Interpretation: susceptibility of long-term yields to global factors aligns with high foreign participation in ASEAN-5 sovereign markets; foreign portfolio flows are a key spillover channel. - Retail bank rates: - Method: approach of Ricci and Shi (2016) estimating domestic and global determinants of deposit and loan rates; specification allows for liquidity effects and rigidities in interest rate transmission. - Findings: - Global financial factors significantly affect bank behavior in ASEAN-5 economies except possibly Thailand. - Domestic policy rate and liquidity conditions (reserve money deviation from a Hodrick-Prescott trend) also matter, highlighting the role of domestic monetary policy and liquidity management in influencing the credit cycle. - Thailand may differ due to increased provisioning rates by the Bank of Thailand and tightening of banks’ lending standards, possibly related to rising household leverage. ### Econometric tables and significance notes (selected) - Significance notation used across tables: 1/ *** significant at .01 level; ** significant at .05 level; * significant at .10 level. - Table 2: Cross correlation of principal factors and global variables includes: - Factor loadings and correlations with VIX and U.S. 10-Year Government Bond Rate for Indonesia, Malaysia, Philippines, Singapore, Thailand (detailed coefficients in source). - Note: VIX coefficient for the Philippines refers to change in VIX rather than VIX index. - Table 3: Determinants of Sovereign Bond Yields (10-year government bond) — coefficients reflect marginal increase in interest rates in percent of a 1 percentage point rise in explanatory variables. Variables include Debt to GDP ratio, Expected GDP, Inflation, Current account balance in percent of GDP (-1), Expected exchange rates (1-year forecast), Share of foreign holdings in total LCY government bonds, VIX, Shadow Federal funds rate, U.S. term premium. (Detailed country coefficients in source.) - Table 4: Determinants of Deposit Rates — variables include Policy rate, Reserve money gap, Deposit interest rate (-1), VIX, Federal funds rate, U.S. term premium. (Detailed country coefficients in source.) - Table 5: Determinants of Lending Rates — variables include Reserve money gap, Lending interest rate (-1), VIX, U.S. term premium, Federal funds rate, Policy rate. (Detailed country coefficients in source.) *Source: _cr16176 - 5. The move towards greater exchange rate flexibility has supported the transition to a — IMF PDF chapter content provided above.* ### 12. An active operational framework that aligns market conditions with the announced ### _cr16176 - 12. An active operational framework that aligns market conditions with the announced ### Active operational framework and interest-rate transmission - An active operational framework that aligns market conditions with the announced policy stance has helped maintain the effectiveness of policy rate transmission in most periods despite rising sensitivity to global factors. - Central bank operations in the ASEAN-5 economies have generally aligned market rates with the announced interest rate corridor except: - Philippines: until recently, short-term money market rates were much lower than the policy rate corridor due to difficulty mopping up excess liquidity from the surge in capital inflows during 2009–2011 given limited instruments. - Indonesia: the overnight interbank rate was effectively at the bottom of the policy interest rate corridor reflecting challenges in ramping up open market operations with limited instruments in the context of UMPs in AEs. - An effectively implemented monetary operations framework: - Supports functioning of money markets. - Allows banks to predictably place surplus liquidity with, and obtain short-term funding from, each other or the central bank at rates related to policy rates. - Continued significance of policy rates and liquidity conditions in determining retail bank rates underscores the importance of active liquidity management in a world of excess global liquidity. ### The global financial cycle and its implications - Managing the global financial cycle is a key challenge for ASEAN-5 monetary frameworks. - Evidence indicates a global financial cycle emanating from changes in U.S. monetary policy and global risk aversion that drives domestic financial conditions in the ASEAN-5. - Sensitivity to global factors extends to retail bank rates—the main channel of monetary transmission in the ASEAN-5—raising questions about the traditional “trilemma” view that flexible exchange rates alone fully insulate economies when capital accounts are highly open. - Transmission of global financial factors through domestic asset prices suggests potential amplification via “financial accelerator” effects on the real economy. - Financial deepening: - Lowers sensitivity of EME equity and bond prices to global financial factors (IMF 2014c). - Effects on the foreign exchange market are somewhat weaker. - Generalized reductions in global interest rates and loose liquidity have increased risk of asset price and credit boom-bust cycles in Asia, raising financial stability concerns and risk of disorderly adjustments to sudden stops in capital inflows. ### Monetary policy responses and Taylor rule estimations - Taylor rule framework (standard and augmented) used to gauge policy responses; Singapore’s rule modified to reflect use of the nominal effective exchange rate as the main instrument. - Thick estimation technique employed (estimating all plausible combinations of potential explanatory variables). - Key empirical findings: - Lagged dependent variable coefficient: 0.6 in Malaysia; close to 1.0 in the Philippines—indicating strong preference for interest rate smoothing. - Expected inflation plays a guiding role in policy rate settings in all countries; coefficient estimates on expected inflation exceed those on inflation or core inflation. - Inflation rate most relevant in Thailand: statistically significant coefficients on average for inflation, core, and expected inflation with coefficient value in excess of 1 in response to increases in either core or expected inflation. - Malaysia (a non-inflation targeter) appears least responsive to changes in inflation. - Output gap generally insignificant except in Malaysia, where a negative output gap of 1 percentage point is associated with a 25 basis point reduction in the policy interest rate. - Nontraditional/global factors: - Exchange rate coefficients aggregate insignificant—little role of exchange rate in setting policy interest rates across ASEAN countries. - Global financial crisis dummy statistically significant with large negative sign, ranging between 30 bps for Malaysia to 75 bps for Indonesia. - VIX significance: a 30 point increase in the VIX (e.g., September 2011) associated with a decline in policy rates of 10‒45 bps. - Role of U.S. interest rates: - Higher U.S. short-term interest rates generally associated with higher policy rates in the ASEAN-5 (for both federal funds rate and shadow-short term rate). - U.S. shadow interest rates associated with UMPs have exerted significant downward pressure on ASEAN-5 policy interest rates. - Heterogeneity: estimated impact smaller in more financially developed markets of Malaysia and Singapore. - Suggests potential structural break to a “new normal.” ### Gross capital flows, reserves, and external adjustment - Gross capital outflows have smoothed adjustment to the global financial cycle while reserves have acted as an important buffer. - Contributions from capital inflows and outflows vary sizably over time across the ASEAN-5. - Financial market development can foster private sector outflows during nonresident inflow episodes, helping stabilize net capital flows (IMF 2013d). - Reserve accumulation: - Built up from low levels prior to the GFC to comfortable levels prior to the GFC in many cases (Figure 11 referenced). - Accumulation during large gross capital inflows in 2002‒2007 and 2009‒2011; drawdowns during large gross capital outflows in 2008‒2009 and 2013‒2015. - Indonesia, Philippines, and Thailand ran current account deficits in response to large gross capital inflows pre-AFC but managed to isolate current account from fluctuations via counteracting gross capital outflows and reserve accumulation. - Singapore: variations in gross capital inflows largely offset by similar variations in gross capital outflows with little action in the current account or reserve accumulation. - Since 2013: - Gross capital inflows moderated; ASEAN-5 reduced pace of reserve accumulation or deccumulated (Figure 12 referenced). - Sale of foreign assets helps repay residents’ foreign-currency liabilities and reduce balance-sheet fragilities; growing ability to issue local-currency debt supports this. - ASEAN-5 relied more on currency depreciation than reserves changes in 2013–15 compared to previous episodes. - External gaps based on the External Balance Assessment (EBA) approach narrowed over the two global financial cycles and were largely closed during outflow episodes. - Reserve buffers drawn down in some cases close to lower bound of the Fund’s reserve adequacy metric range (Indonesia and Malaysia); Philippines and Thailand maintained reserves above the range. - Tradeoff: self-insurance motive for reserves versus cost of holding reserves. ### Exchange rate management and sterilization - Degree of FX intervention: - ASEAN-5 are not among those with highest degree of FX intervention except Singapore. - Indonesia’s degree of exchange rate management is the lowest and comparable to some advanced economies like Japan. - Philippines and Thailand have slightly higher degree of exchange rate management. - Malaysia around the median of the sample between Russia and Argentina. - Singapore has a very high degree of exchange rate management, comparable to China, consistent with its exchange-rate-based approach. - Sterilization of FX intervention: - Sterilization coefficient (β) estimated following Aizenman and Glick (2008); β=-1 implies full sterilization; β=0 implies no sterilization; -1<β<0 partial sterilization. - Average sterilization coefficients have remained close to β=-1 in the post-AFC period. - Temporary periods of partial sterilization occurred in Indonesia, Malaysia, and the Philippines during strong reserve accumulation. - Table 6: Average sterilization coefficient using one-month extended window in specified periods: - Indonesia: -0.957 (Pre-GFC), -0.901 (GFC), -0.838 (Post-GFC), -0.824 (Taper Tantrum) - Malaysia: -0.933 (Pre-GFC), -0.914 (GFC), -0.871 (Post-GFC), -0.839 (Taper Tantrum) - Philippines: -0.806 (Pre-GFC), -0.709 (GFC), -0.765 (Post-GFC), -0.833 (Taper Tantrum) - Singapore: -0.989 (Pre-GFC), -0.981 (GFC), -1.000 (Post-GFC), -1.004 (Taper Tantrum) - Thailand: -1.000 (Pre-GFC), -1.000 (GFC), -1.000 (Post-GFC), -1.000 (Taper Tantrum) ### Costs of reserve buffers and FX intervention - Marginal opportunity cost of reserve buffers estimated as cost of rolling over FX positions (departures from UIP) following Adler and Mano (2016). - Ex-post marginal costs of FX intervention (departures from UIP) have been sizeable in the sample. - Ex-ante (policy-relevant) expected costs estimated using survey-based expectations and statistical model estimates: - Average ex-ante total costs (percent of GDP): - Indonesia: 0.6 percent of GDP - Philippines: 0.7 percent of GDP - Thailand: 0.9 percent of GDP - Malaysia: 1.0 percent of GDP - Singapore: 1.3 percent of GDP - Total cost for the median EME: 0.5 percent of GDP - Conclusion: Total costs of FX reserve buffers for ASEAN-5 are in line with a broad sample, albeit slightly on the high side. *Source: ASEAN-5 CLUSTER REPORT, INTERNATIONAL MONETARY FUND (content unit: _cr16176 - 12. An active operational framework that aligns market conditions with the announced).* ### 23. Capital inflows present ### 23. Capital inflows present ### Financial stability risks from capital inflows - Capital inflows can address long-standing investment needs, such as in infrastructure, but "especially short-term portfolio flows, need to be managed carefully in order to avoid macroeconomic and financial stability risks." - Channels through which capital flows generate financial stability risks (IMF 2014a): - (i) increases in short-term wholesale funding of the banking system; - (ii) increases in foreign currency funding of the financial system; - (iii) contributions of capital inflows to local credit booms and asset price appreciation; - (iv) credit risks from foreign currency denominated loans. - Credit cycles related to capital inflows can complicate monetary management and raise systemic risks, potentially creating feedback loops between corporate/household sectors and banks. - Historical pattern in Asia: high liquidity growth concurrent with large capital inflows increases the risk of asset price boom and bust cycles (Gupta and others, 2009). ### Evidence on credit booms in the ASEAN-5 - Methodologies used to identify credit booms: - Mendoza and Terrones (2008): deviations of real credit per capita from HP trend; credit boom if deviation > 1.75 times its standard deviation. - Dell’Ariccia and others (2012): deviations of credit-to-GDP from a rolling cubic trend. - IMF GFSR (September 2011): increases in credit-to-GDP above 3 percent as early warning; increases above 5 percent indicate more advanced/severe credit booms. - Main findings: - All three approaches identify credit booms prior to the AFC in all ASEAN-5 economies. - Except for Singapore, evidence for credit booms in the run up to the GFC or thereafter is limited. - For Singapore, greater weight should be given to the Mendoza & Terrones and Dell’Ariccia approaches because Singapore’s high credit-to-GDP ratio (as a financial center) makes the GFSR threshold more likely to be exceeded. ### Sectoral imbalances and pockets of vulnerability - Aggregate measures mask sectoral imbalances: - Household debt increased rapidly in Malaysia and Thailand, with household debt-to-GDP ratios "now standing above 80 percent of GDP in both economies." - The run-up in household debt was driven by mortgage lending during a period of rapid house price inflation. - Corporate debt rose in ASEAN-5 during the UMP period but "appears manageable" at the aggregate level; pockets of vulnerability may exist among segments of corporates or a few firms. - Corporate leverage specifics: - Singapore and Thailand had "more than 80 percent corporate debt-to-GDP ratios as of end-2014." - Buffers barely moved between 2007 and 2014; only the Philippines increased its 25th percentile of interest coverage ratio while interest coverage ratio (ICR) significantly declined in Singapore. - Empirical caution: assessing household financial stability risks requires examination of household balance sheets (D’Alessio and Iezzi 2013), which is beyond the scope of this paper. ### Macroprudential policies (MPPs) and capital flow measures (CFMs) - Rationale: - Rising household leverage and the real estate price cycle motivated the broadening of the toolkit to sectoral MPPs in ASEAN-5. - Observed actions and effects: - Indices (Zhang and Zoli, 2014) show increasing use of MPPs in the wake of the GFC, particularly housing-related measures. - Indonesia: housing loan growth slowed from a peak of "32 percent y/y in Q3:2013 to 12 percent in Q3:2014" after tightening loan-to-value (LTV) ratios in June and September 2013; house price inflation slowed from "13.5 percent in Q3:2013 to 6.5 percent in Q3:2014." - Malaysia and Thailand: countercyclical tightening/loosening of MPPs (e.g., LTVs, real property gain tax, mortgages cap) corresponding to housing cycles. - Singapore: progressive tightening of mainly housing-related measures and a sharp fall in housing loans and prices; Singapore’s additional buyer's stamp duty considered both a MPP and a CFM. - Philippines: no formal MPPs for real estate loan growth but enhanced monitoring and regular stress testing of housing loan portfolios; moral suasion and enhanced supervision may have indirectly slowed house price appreciation and construction/real estate loan growth. - Use of CFMs: - Mostly limited to reserve requirements on FX deposits across the region; Indonesia and Thailand also used restrictions on bond holding periods or withholding tax for foreigners. - Some evidence these measures were effective in reining in rapid foreign participation in local currency bond markets, though vulnerability to shifts in foreign portfolio sentiment remained high. - Philippines imposed a higher differential capital charge on domestic and foreign banks’ NDF exposures as a macroprudential tool that significantly reduced NDF positions of onshore banks. - Overall limited reliance on CFMs may reflect prior negative experiences, mixed evidence on effectiveness (Zhang and Zoli, 2014), and a preference for targeted approaches changing composition toward less volatile flows (Sahay and others, 2014). ### Policy responses to capital outflow episodes (GFC, Taper Tantrum, Summer 2015) - Range of tools used to supplement monetary policy: fiscal measures, MPPs, CFMs, FX intervention, liquidity provision measures. - Monetary policy movements: - During the AFC all countries raised policy rates to support external positions. - After the GFC, ASEAN-5 eased policy rates to support growth. - During the taper tantrum, only Indonesia raised policy rates to support external position; Malaysia and the Philippines tightened modestly for domestic stability; Singapore and Thailand gradually eased monetary policy from 2011–2012. - Summer 2015 turbulence: policy rates left unchanged in all ASEAN-5 economies; Indonesia began loosening monetary policy in January 2016. - Differential country responses and tools deployed: - GFC period: Indonesia, Malaysia, Philippines lowered reserve requirements and expanded liquidity provision; all ASEAN-5 expanded depositor insurance guarantees; fiscal stimulus packages implemented. - Taper tantrum: Indonesia prioritized stability—tightened reserve requirements and LTVs, allowed exchange rate and long-term yields to move after initial containment, tightened fiscal policy with "an average 33 percent increase in subsidized fuel prices." - Summer 2015: reserve requirements largely unchanged during summer but were later reduced in December and January in Indonesia and Malaysia, respectively. - Specific measures noted in Table 8 (selected examples preserved as in source): - Policy rate: Lowered / Raised / Unchanged (varied by country and episode). - Exchange rate corridor band: Recentered to validate a weaker currency (for Singapore) / Unchanged (others). - Exchange rate depreciation: Yes in several episodes. - Drawdown of Reserves: Yes in several episodes. - Macroprudential policy: tightened LTVs and other property/loan limits in several countries. - Reserve requirements: Lowered / Raised / Lowered (varied). - Capital flow measures: Shortened minimum holding period for central bank bills; imposed limits on banks' NDF exposures. - FX interventions and liquidity provision measures: Yes across episodes. - Expansion of deposit insurance coverage: Yes across episodes. - Fiscal policy: Expansive in many episodes; some tightening during the taper tantrum in Indonesia. ### Foreign reserves, exchange rate flexibility, and market smoothing - Foreign reserves used as a buffer, combined with greater exchange rate flexibility, to cushion economies and avoid disorderly market conditions. - During the GFC all ASEAN-5 currencies depreciated significantly, letting exchange rates act as shock absorbers. - The net capital outflows during the taper tantrum were smaller than during the GFC but markets differentiated across countries by macro fundamentals; Indonesia faced severe pressure due to twin deficits, prompting more FX intervention. - During the 2015 summer turbulence, equity markets experienced volatility; foreign reserve drawdowns were most pronounced in Indonesia and Malaysia (commodity exporters), with reserves "falling close to the Fund’s reserve adequacy metric." - Greater exchange rate flexibility helped smooth "excess" volatility and preserve orderly market conditions. *Source: _cr16176 - 23. Capital inflows present* ### 34. In some circumstances, the motivation for FX intervention may be to mitigate capital ### 34. In some circumstances, the motivation for FX intervention may be to mitigate capital ### FX intervention: objectives, conditions, and trade-offs - Objectives and rationale - Mitigate capital flow shocks and counter potentially disorderly market conditions. - Help counter periods when excessive currency volatility causes the exchange rate to stop operating as a shock absorber and instead become a shock amplifier, including through balance sheet concerns. - Can be sustained but needs to be two-sided as observed in the ASEAN-5 countries. - Conditions for justification - Exchange rate volatility and/or overshooting a level consistent with macroeconomic fundamentals does not constitute disorderly market conditions per se, but only to the extent that it amplifies adverse shocks. - Risks and constraints - Excessive intervention can undermine the clarity and credibility of the monetary policy framework, especially when intervention is frequent and disorderly market conditions are absent. - The consistency of the overall policy mix must be ensured so that FX intervention does not substitute for other needed policy changes. - FX intervention benefits in dampening shocks should be weighed against potential costs to the credibility of the policy framework. - Mitigating measures - Good communication and enhanced transparency could help clarify objectives of FX intervention. - Analytical note - Impact of adding FX intervention to a standard Taylor-rule type of monetary policy function is explored in Ding and Peiris (forthcoming) using a modified Forecasting and Policy Analysis (FPAS) model. ### Lessons from evolution of monetary policy frameworks in the ASEAN-5 - Historical shifts and drivers - Major reforms followed the AFC in 1997‒1998 and the GFC in 2007‒2009. - Before the AFC, tightly pegged exchange rates contributed to vulnerabilities (excessive borrowing and currency mismatch), leading to sharp depreciations when capital flows reversed. - Post-AFC adjustments allowed more exchange rate flexibility to gain greater monetary policy autonomy with a more open capital account. - All countries have low inflation as an objective; Thailand, Indonesia, and Philippines adopted inflation targeting (Thailand in the context of a Fund-supported program; Indonesia and the Philippines in post-program monitoring arrangements). - Foreign reserves were built up as insurance against volatility shocks and financial regulatory frameworks were strengthened. - Performance during crises - Monetary policy frameworks delivered price and output stability during significant domestic and regional turbulence. - Flexible inflation-targeting frameworks (and Singapore’s unique exchange rate based targeting) served the ASEAN-5 economies well. - ASEAN-5 were more resilient than other EMEs during the GFC due to relatively low financial and external vulnerabilities, following a decade of reforms after the AFC. - Move to more flexible exchange rates and stricter microprudential and macroprudential policies helped avoid buildup of short-term foreign currency debt and allowed exchange rates to act as shock absorbers during the GFC. - Foreign reserves rose significantly, providing an important buffer to capital flow volatility; reserves have generally been drawn down during periods of capital outflows, with no statistical evidence of targeting a specific level of the exchange rate. - Costs and vulnerabilities - Fully sterilizing reserve buildup and active liquidity management insulated aggregate credit conditions and anchored market expectations but entailed significant quasi-fiscal costs. - Fund’s reserve adequacy metric suggests reserve buildup in some ASEAN-5 economies may have been excessive at times, especially during surges in capital inflows. - Financial integration and capital flow volatility make domestic financial conditions susceptible to global financial spillovers, though policy rates and liquidity management remain important for monetary transmission. - Policy toolkit evolution and future directions - Broadening of toolkit to macroprudential policies (MPPs) was related to sectoral financial stability risks; raising policy rates in open economies may induce more capital inflows and exacerbate financial stability challenges. - Widespread use of sectoral MPPs reflects limited evidence of generalized credit booms but emergence of pockets of excessive leverage among households and house price inflation. - Normalization of U.S. monetary policy should provide greater scope for monetary policy independence in the ASEAN-5 economies. - ASEAN-5 economies may need to consider implementation of more countercyclical MPPs (such as Basel III’s countercyclical capital requirements) and/or loosening existing MPPs and CFMs in the event of prolonged lower global growth or negative shocks, balance sheet considerations permitting. - Additional intermediate objectives (financial and external stability) will play a greater role and should be targeted with additional instruments (e.g., MPPs, CFMs, and FX intervention). - Risks: reserve buffers falling below critical levels, generalized credit and asset price booms, leveraged households and corporates facing difficulty servicing debt, divergence between asset price and inflation cycles, and ASEAN Economic Community’s move toward financial liberalization and freer capital flows by 2025 posing cross-border and financial sector challenges. ### Key country-level monetary policy framework features (selected exact figures from Appendix I) - Medium-term inflation objectives and related numbers - Indonesia: Government approved inflation target 2013‒2015: 4.0% ±1 percentage point (ppt). - Malaysia: Comfort level of about 3%. - Philippines: Government approved inflation target 2015‒2018: 3.0% ±1 ppt; BSP inflation forecast 2015: below the range of 3.0% ± 1.0 ppt; 2016: low end of 3.0%±1.0 ppt; 2017: midpoint of 3.0%±1.0 ppt. - Singapore: Comfort level of about 2%. - Thailand: Government approved inflation target 2015: 2.5% ±1.5 ppt; BOT inflation forecast 2015: -0.9%; 2016: 1.2%. - Reserve requirement statutory ratios (exact reported values) - Indonesia: Primary RRR (7%) + secondary RRR on liquid assets (2.5%). - Malaysia: 3.5%, commercial banks. - Philippines: 20%, universal and commercial banks. - Singapore: 3%, all banks. - Thailand: 1%, commercial banks. - Reporting, transparency, and timing (selected) - Inflation report frequency: Indonesia Monthly; Philippines Quarterly; Singapore Semi-annual; Thailand Quarterly; Malaysia Not available. - Public release of monetary policy stance: Same day for all five countries. - Minutes/highlights of monetary policy meetings: Indonesia Yes; Malaysia Not available; Philippines A month after meeting date; Singapore Not available; Thailand Two weeks after meeting date. - Accountability reporting: Indonesia quarterly report to the Parliament/public; Malaysia regular reporting to the Minister of Finance; Philippines annual report to the President and Congress/public; Singapore annual report to the Parliament; Thailand semestral report to the Cabinet. - Public document/explanation in case of missed target: Indonesia Yes, report to the Parliament/public; Malaysia Yes, open letter to the President; Philippines NA; Singapore Yes, open letter to the Minister of Finance. *Source: ASEAN-5 CLUSTER REPORT (selected sections and Appendix I).* ### Introduction ### Introduction ### Methodology and purpose - Outlines methodology used to analyze how macroeconomic developments guide monetary policy settings for the ASEAN-5 countries. - Relies on estimation of Taylor rules; instead of a single equation, results from a large number of plausible models are aggregated. - Estimation results are averaged using bootstrap aggregation techniques (bagging) with re-sampling over 10,000 iterations for each model specification. ### Specification of the Taylor Rule - Standard Taylor rule used (notation as in source): - Policy interest rate (t i) is a weighted average of lagged policy interest rate and desired settings based on inflation (t π) or deviation from target (t π), and lagged output gap (1t ygap−). - Empirical options considered: - Inflation measures: headline, core, expected inflation. - Output gap measures: deviations from a rolling one-sided Hodrick-Prescott filter with parameter 1,600 and a smoother measure with parameter 16,000. - Additional explanatory variables: exchange rate measures, measures of global uncertainty (VIX), and United States interest rates. ### Thick Modeling Approach - All plausible combinations of potential explanatory variables are estimated (e.g., one of three inflation measures × one of two output gap measures; optional inclusion of exchange rate, U.S. interest rates, or global volatility). - Coefficient estimates from all specifications are averaged (bootstrap aggregation) and standard errors are computed from the pooled sample of estimates. - Purpose: provide insight into whether a variable guides policy decisions in general and avoid overreliance on a single preferred specification. ### Empirical Results — fit and persistence - Taylor rule models fit the data very well: R-squared are generally above 80 percent and frequently in excess of 90 percent. - Lagged dependent variable (policy rate inertia): - Above 60 percent in the case of Malaysia. - Very close to one in the case of Philippines. - Interpreted as a gradualist approach to monetary policy. ### Empirical Results — inflation - Inflation is relevant in guiding policy rate settings. - In most countries, the estimated reaction coefficient to expected inflation is higher than that on either inflation or core inflation, suggesting a stronger reaction to expected inflation. - Thailand: - Inflation plays the largest role. - Statistically significant coefficients on average for all three inflation variables. - Coefficient estimates in excess of one for core or expected inflation (implying monetary policy raises the real interest rate when inflation rises). - Indonesia: - Headline inflation is the most relevant of the three measures. - An estimated coefficient of 0.5 percent falls (text wording preserved) implies deviations of inflation from the target are not met with an increase in the real interest rate. - Philippines: - Estimated coefficients for inflation measures are all greater than one, but none are statistically significant. - Malaysia: - Least responsive to changes in inflation among ASEAN-5; estimated coefficients are close to zero. - Malaysia is noted as the only non-inflation targeting central bank in the group. ### Box II.1 — Singapore: Monetary Policy Rules - Taylor rule reformulated with percentage change in the nominal effective exchange rate (t neerΔ) replacing policy interest rate. - Coefficient on lagged change in nominal effective exchange rate is about 0.6 on aggregate, indicating gradualism. - Estimated inflation reaction coefficients are positive; reaction greatest for expected inflation (forward-looking framework). - Estimated reactions to output gap measures are small and positive, statistically significant when the smoother potential output measure (HP parameter 16,000) is used. - U.S. interest rates, the VIX, and a global financial crisis dummy are not found to have a statistically significant impact on aggregate monetary policy settings for Singapore. ### Empirical Results — output gap - Output gap generally insignificant except in Malaysia. - In Malaysia, a negative output gap of one percentage point is associated with a 25 basis point reduction in the policy interest rate. - Suggests Malaysia places greater emphasis on output rather than inflation. ### Empirical Results — exchange rate - Three measures considered: nominal effective exchange rate, real effective exchange rate, and bilateral USD exchange rate (all expressed as deviations from a linear trend). - On aggregate, exchange rate coefficients are statistically insignificant, suggesting little role for the exchange rate in setting policy interest rates in the ASEAN-5 on average. ### Empirical Results — global shocks and VIX - Global financial crisis dummy included for Q4:2008–Q2:2009: - Statistically significant with a large negative sign. - Captures additional reduction in policy rates outside domestic considerations during that peak period. - Range of estimated additional reductions: between 30bps for Malaysia and 75bps for Indonesia. - VIX: - Generally statistically significant. - A 30 point increase in the VIX (for example, as occurred in September 2011) has been associated with a decline in policy rates between 10‒45 bps. ### Empirical Results — U.S. monetary policy - Three U.S. variables considered: federal funds rate; a shadow federal funds rate; and 5-year Treasury yield. - Shadow short rate (Krippner, 2014) used to capture unconventional monetary policy effects below the zero lower bound. - Higher U.S. short-term interest rates generally associated with higher policy rates in ASEAN-5. - Impact is greater when the shadow short-term rate is used. - Statistical significance: - Shadow short rate significant at 5 percent for Indonesia. - Significant at 10 percent for Thailand and the Philippines. - Illustration in main text: U.S. monetary policy put downward pressure on ASEAN-5 policy rates—lower by as much as 2.5 percentage points in Indonesia, with impacts narrowing more recently. ### Appendix III — The Fallout from Recent Capital Outflow Episodes: key facts - Context: GFC, 2013 “Taper Tantrum,” and 2015 summer volatility tied to China concerns; differing impact across ASEAN-5 and differing policy responses. - Cumulative non-FDI outflows during 2008:Q3–2009:Q1 exceeded US$90 billion as nonresidents reduced holdings of domestic assets. - Portfolio flow dynamics: - Cumulative net portfolio outflows between June 2013 and March 2014 reached almost US$20 billion (EPFR data). - Comparison: US$8 billion outflows during September 2008–March 2009. - Financial volatility in summer 2015 associated with net equity portfolio outflows that, cumulative over a seven months period, reached the same amount as in the taper tantrum episode. - Initially bond flows were less affected by the renminbi adjustment in 2015, but bond flows later retrenched. - Malaysia and Indonesia experienced the largest outflows in 2015. - Portfolio flows to ASEAN-5 turned positive again only in February–March 2016. - Equity markets: - Stock prices fell sharply during the GFC—more than 30 percent on average between September 2008 and March 2009. - Taper tantrum (June–August 2013): equity price declines greatest in Indonesia, the Philippines, and Thailand (15 percent on average); more contained in Malaysia and Singapore (~5 percent). - Between August and September 2015: Indonesia and Singapore experienced a 12 percent drop in stock prices; Malaysia, the Philippines, and Thailand saw equity prices fall by 6‒9 percent, with a rebound in following months. - Sovereign CDS spreads and government bond yields: - Surge in sovereign CDS spreads between September 2008 and February 2009 ranged from about 90 bps (Singapore) to nearly 400 bps (Indonesia). - During the taper tantrum, Indonesia saw a rise of 124 bps in sovereign spreads and 250 bps in government bond yields between May and September 2013. - During 2015 summer turbulence, Indonesia’s government bond yields and sovereign CDS spreads widened again by more than 100 basis points; Malaysia’s sovereign CDS spreads increased by about 100 basis points. - Exchange market pressure: - Capital flow reversals resulted in exchange rate depreciation and reserve drawdown. - Indonesia and Malaysia: rupiah and ringgit lost 29 percent of their values against the U.S. dollar between April 2013 and December 2015. - Malaysia’s FX reserves declined by 32 percent over the same period. *Source: _cr16176 - Introduction (IMF PDF)._ ### References ### _cr16176 - References ### Academic articles and working papers - Adler, G., N. Lisack, and R. 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