Was the degree of financial integration in selected East Asian economies influenced by the 1997 Asian crisis? A view through the saving-investment relationship C. Bautista & S. Maveyraud-Tricoire Safety and efficiency of the financial system August 27th 2007 Manila, Philippines

Capital flows and the financial crisis in South East Asia Summary Capital flows and the financial crisis in South East Asia Empirical analysis of the saving-investment relation The saving-investment relationship in the framework the Markov-switching model Data and empirical results Concluding remarks

Capital flows and the financial crisis in South East Asia Financial sector profile

Empirical analysis of the saving-investment The Feldstein-Horioka proposition: In a closed economy, domestic investment and domestic saving are equal. One would therefore expect a perfect correlation between these two macroeconomic aggregates. In an open economy, with capital mobility, foreign saving could be tapped and investment is no longer constrained by domestic saving. Hence, the high correlation should no longer be expected to hold and domestic saving and investment need not travel the same paths The FH regression:

Empirical analysis of the saving-investment several studies that cover developing Asian countries mainly with panel data Isaksson (2001): 1975-1995; large coefficients Sinha (2002): 1950-1999; weak financial integration Kim et al. (2005): smaller values for 1980-1998 period than for the 1960-1979 period Kim et al. (2006): 1980-2002; saving retention ratios weaker for Asian countries than for most OECD countries and decreasing over time Any empirical study on the impact of the Asian crisis on the saving-investment relationship

The saving-investment relationship and the Markov-switching model Benefits of using the markov switching model: slope, intercept and the error variance allowed to change determines how and when shifts in the degree of capital mobility occurred Equation: The binary variable m is assumed to represent either a high or low degree (or state) of capital mobility in an economy at date t.

Data and results Data: Countries: Hong-Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore and Thailand Data from the Penn World Table 6.2 Covered period: 1965 to 2004

Data used in the study

Estimation Results

Smoothed Probability – Low SR coefficient

Smoothed Probability – Low SR coefficient

Concluding remarks and prospects The Asian financial crisis has an impact on the saving-investment relationship for most Asian countries: weaker saving-investment correlations suggest that financial integration intensifies after the financial crisis. Economies with relatively stronger financial systems like Singapore appear to remain unaffected Prospects undertaking further research on the puzzling result: low saving retention coefficients associated with current account surpluses