تعدیل بدهی های خارجی بانک در سیاست های پولی: بازنگری همکاری های پولی در شرق آسیا

This paper addresses the cost of formal monetary cooperation from the perspective of monetary policy effectiveness. As banks tend to borrow from abroad in foreign currencies to fund domestic lending, monetary policy may have a reduced effect on the credit market and the economy. Results derived from bank level data in East Asia indicate that bank foreign liabilities significantly reduce the effectiveness of the credit channel of monetary policy, implying a relatively low cost of giving up monetary autonomy.

Since the 1997 Asian crisis, there has been an increased interest in monetary cooperation in East Asia.1 Formal monetary cooperation, such as monetary union, reduces the cost of intra-regional trade and promotes economic integration, while its major cost is the loss of monetary policy autonomy. Existing literature on the feasibility of a monetary union or a common currency peg in East Asia often takes an indirect approach to address the cost. A common approach in empirical studies is to examine the similarity of shocks across the region in order to understand the need for monetary policy autonomy. In contrast to the existing literature, this paper addresses the cost of forming a monetary union through the effectiveness of individual economies’ monetary policy. The cost of abandoning monetary autonomy is directly associated with the effectiveness of monetary policy. Losing a highly effective monetary policy is, of course, costly. However, monetary policy in many emerging and developing countries is ineffective. The ineffectiveness may be caused by many factors. For example, in China, the government often directly intervenes in bank lending in favor of state enterprises; banks’ practice of maintaining large amount of excess reserves also plays a role (Goodfriend and Prasad, 2006). This paper proposes that foreign liabilities held by banks undermine monetary policy effectiveness, implying a relatively low cost of giving up monetary autonomy. Thus, when considering forming a monetary union, the issue of monetary autonomy should be less of a concern for these economies. To date, this point has not been established in the literature on the feasibility of monetary union. The issue of bank foreign liabilities is particularly relevant to East Asia. Emerging economies, including those in East Asia (even though some of them are now classified as high income economies), continuously face the “original sin” problem and the threat of sudden stops of financial inflows. The lack of sufficient flexibility in their exchange rate regimes encourages banks to borrow from abroad in foreign currencies to fund domestic lending, and lending booms may occur in the absence of monetary stimulation. When international funding dries up, the problem of balance sheet mismatches (in currency and maturity) is exposed, especially when accompanied with an exchange rate crisis. In such circumstances, banks are forced to cut loans, or even become insolvent. Thus, the cycles of dollarized borrowing create lending cycles and interfere with the normal functioning of the credit channel of monetary policy. This paper also contributes to the understanding of liability dollarization and the monetary transmission mechanism in emerging economies. Particularly, the connection between the two has not been explored much in existing studies. Through the study of the role of foreign liabilities in the functioning of the credit channel for eight East Asian economies (China, Hong Kong, Korea, Indonesia, Malaysia, Philippines, Thailand, and Singapore), where external liabilities are generally dollarized (as in other emerging economies), this paper can shed some new light on these issues. The remainder of the paper is organized as follows. Section 2 discusses the weakness of the East Asian exchange rate arrangements and the justification for considering monetary cooperation. Here, the literature related to this paper is also reviewed. Section 3 presents a testable model and describes the data. Section 4 discusses the diagnostics of the empirical model and reports the results. Section 5 contains the conclusion and final discussions.

In emerging and developing economies, banks tend to borrow in foreign currencies from abroad to fund domestic lending, resulting in currency and maturity mismatches in their balance sheets and high risks of capital flight and financial crisis. The “soft peg” system in most East Asian economies further exacerbated the problem, as witnessed by the 1997 crisis. The crisis spurred much discussion in monetary cooperation in East Asia. Existing research on the cost of monetary cooperation commonly considers the need of maintaining monetary policy autonomy by assessing similarity of shocks across the region. This study takes a unique approach and considers the cost from the perspective of monetary policy effectiveness. The rationale is that with an ineffective monetary policy, the cost of forming a monetary union would be relatively low. The results reveal evidence of dysfunction in the credit channel of monetary transmission in East Asia due to interference from banks’ external borrowing. There is a direct link between bank lending and their foreign liability holdings, especially during normal times when the economy is not experiencing a sudden stop. As a result, banks do not respond to the monetary policy rate as desired; instead, they are responsive to the international interest rate. This result indicates the central banks’ weakened ability to use monetary policy to stabilize the economy. Thus, the cost of sacrificing monetary autonomy to form a monetary union is lower for these economies than when monetary policy is effective. In addition, for the purpose of limiting liability dollarization and the associated risks, the results on the role of exchange rate volatility also suggest the form of monetary cooperation or joint exchange rate arrangement should allow flexibility of the exchange rate, as it discourages excessive external borrowing. Formal monetary cooperation fosters financial integration and can have a number of benefits. The depth of the Asian financial markets may increase with the size of the integrated market. As a result of increased financial flows within the region, members may have less need to rely on external borrowing outside of the region, therefore reducing the degree of liability dollarization. Another benefit is that East Asian economies can reduce costly holdings of large amounts of reserves, while simultaneously enhancing their ability to protect themselves against financial and exchange rate crises. After the Asian crisis, these economies built up a safety net at the cost of holding massive low return reserves.11 By alleviating the problem of liability dollarization through fostering intra-regional lending, monetary cooperation may reduce their vulnerability to sudden stops, thus reducing the size of reserves needed for crisis insurance purposes. In addition, preparation for monetary cooperation will introduce the idea and practice of centralized decision making, which can expedite the establishment of a more effective reserve pooling institution – such as the Asian Monetary Fund12 – than the current facility under the Chiang Mai Initiative. As a result, individual economies will have less need to rely on their own reserves for self-insurance. Stronger regional support will also increase their ability to guard against crises. A well designed integration process can establish credibility of the monetary system and strengthen financial institutions in the region. The resulting stronger reputation of the common currency may further reduce the risk of sudden stops by increasing the members’ capability to borrow in their own currency. As a result, the need for formal or informal pegs may be reduced, and the common currency can adopt an independently floating system, which facilitates the retention of monetary policy as a stabilizing instrument. In this case, by abandoning ineffective independent monetary policy, these economies may gain a more effective regional cooperative monetary policy.