1. 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

2. 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

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

4. 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:

5. Empirical analysis of the saving-investment
several studies that cover developing Asian countries mainly with panel data
Isaksson (2001): ; large coefficients
Sinha (2002): ; weak financial integration
Kim et al. (2005): smaller values for period than for the period
Kim et al. (2006): ; 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

6. 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.

7. 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

8. Data used in the study

9. Estimation Results

10. Smoothed Probability – Low SR coefficient

11. Smoothed Probability – Low SR coefficient

12. 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