Hot Money and Business Cycle Volatility: Evidence from Selected ASEAN Countries

Abstract

This study investigates the linkage between speculative capital and business cycles in Malaysia, Thailand, and Singapore from 1981:Q1 to 2012:Q4. We use the multivariate Markov-switching intercept autoregressive heteroskedasticity vector autoregressive (MSIAH-VAR) model and observe that while speculative shocks during the tranquil period temporarily promoted Malaysia’s economic growth, they temporarily damaged economic growth in Thailand and Singapore. Moreover, speculative capital flows from abroad exacerbated economic volatility and damaged economic growth prospects for all these countries during the crisis period. Thus, it may be important for policymakers to take appropriate actions against the potential risk of economic instability and market volatility from speculative capital.

KEY WORDS:

• business cycle
• ASEAN
• hot money
• MSVAR

Acknowledgments

We are grateful to the two anonymous referees for their helpful comments and suggestions.

Notes

1. For other applications of the MSIAH-VAR model, refer to Musso et al. (2011) and Simo-Kengne et al. (2013). Also see Yang and Hamori (2014).

2. For other analysis of business cycle, refer to Süssmuth and Woitek (2004) and Altuğ and Bildirici (2012).

3. The trend of hot money in Singapore is found to be stationary in both levels.

4. We conduct Granger causality tests using a standard VAR model with one lag to determine whether the lagged values of one variable can help forecast the movements of other variables. Our empirical results indicate that hot money Granger causes GDP growth rate at the 5 percent level for both Malaysia and Singapore, while GDP growth rate Granger causes hot money at the 1 percent level for Thailand.

5. Instead of asking the IMF for assistance, the Malaysian government employed a reflation policy package that included a fixed exchange rate and interest rate cuts to revitalize the economy and stimulate prices after the Asian currency crisis.