How Do Global Liquidity Phases Manifest Themselves in Asia?

Given the catastrophe in the world’s largest economy and the subsequent unprecedented ultra-easy money policies, policy makers around the world have to face a new environment. The resulting capital flows in emerging market economies were huge and volatile. These flows have been intermediated through the banking sector (Phase One), and through the capital market, especially the fast growing bond market (Phase Two). Benefits and risks arise with these flows. The risks came to the fore after some signs emerged that the quantitative-easing policy in the US may slow down or even reverse, causing a reversal of capital flows. The analysis in this monograph expands on the implications of such a trend for emerging Asia, where financial cycles are falling out of sync with business cycles, reducing the effectiveness of monetary policy and thereby requiring a separate macroprudential policy.