Unconventional monetary policy in the Asian financial crisis

• Date: 01 February 2018
• Author: Joseph Gagnon,Tamim Bayoumi
• Published date: 01 February 2018
• DOI: http://doi.org/10.1111/1468-0106.12254

SPECIAL ISSUE ARTICLE

Unconventional monetary policy in the Asian

financial crisis

†

Tamim Bayoumi

1

| Joseph Gagnon

2

1

International Monetary Fund, Washington, DC

2

Peterson Institute for International Economics,

Washington, DC

Correspondence

Gagnon 1750 Massachusetts Ave. NW,

Washington, DC 20036, USA

Email: jgagnon@piie.com

Abstract

Some of the policies central banks used during the Asian

Financial Crisis had elements of unconventional monetary

policy in that they involved the government buying assets

that the private sector was unwilling to hold. We focus

on public funding of bank recapitalizations in Thailand

and the extraordinary purchase of equities in Hong Kong.

Although it is important to calibrate these policies appro-

priately, we believe they helped to stabilize economies

through channels that were not well understood at the

time of the Asian crisis.

1|INTRODUCTION

During and immediately after the Asian financial crisis of 1997–1998, western economists

placed most of the blame on structural flaws in Asian economies and financial systems, led by

staff at the International Monetary Fund (IMF); accordingly, they focused their policy recom-

mendations on measures to address these flaws. Policy-makers in the affected economies argued

that volatile and destabilizing financial flows were at least partly to blame, but these complaints

did not arouse much sympathy in a policy community in the thrall of the efficient markets

hypothesis. In the aftermath of the North Atlantic financial crisis of 2008, western economists

are far more empathetic to the view that financial markets may not be efficient and may, in fact,

be destabilizing.

One of the key policies used in advanced economies after the North Atlantic crisis was a form

of unconventional monetary policy known as quantitative easing (QE). QE involves large-scale cen-

tral bank purchases of long-term bonds and other nontraditional assets. QE works precisely because

the assets being purchased are not close substitutes for money or short-term risk-free debt. In other

words, QE relies on inefficiency in financial markets.

†

Bayoumi wrote this paper while on sabbatical from the International Monetary Fund at the Peterson Institute. Views

expressed in this paper do not necessarily reflect those of the International Monetary Fund, the Peterson Institute or other

members of their staffs.

Received: 1 December 2016 Accepted: 1 April 2017

DOI: 10.1111/1468-0106.12254

© 2018 Asian Development Bank Institute (ADBI)

Pacific Economic Review © 2018 John Wiley & Sons Australia, Ltd

80 wileyonlinelibrary.com/journal/paer Pacific Economic Review. 2018;23:80–94.