Endnotes

¹For further discussion on financial sector reforms, see Bank Negara Malaysia (2007).

²Note that some of these pull factors may not hold, given the ongoing global credit crunch and subprime issues. Some of the economies in Asia are facing economic slowdown, while others are more successful in weathering the financial turmoil. Nevertheless, Asia as a whole still receives a considerable amount of capital inflows, notably in high interest rate economies.

³For a review of other sterilization measures on capital flows, see Obstfeld (1982), Kumhof (2004), and Takagi (2007) in this volume.

⁴The ringgit exchange rate was fixed at 3.80 per USD on September 2, 1998 and remained until July 21, 2005. Selective exchange controls were introduced on September 1, 1998 to protect the financial system from external influences, and effectively shutting down the offshore ringgit market. For further discussion, see Bank Negara Malaysia (1999) and Ariff (2007).

⁵Note that Malaysia adopted the Fifth Edition of the Balance of Payment Manual of the IMF in 1999. Hence, figures prior to 1999 are not comparable to those from 1999 onwards. For completeness, figures prior to 1999 are presented in Appendix II.

⁶For funds already in Malaysia, there was a price on exit inversely proportional to duration of stay. Capital that had entered the country more than one year was free to leave at a zero exit price. For funds yet to come in there was a levy only on profits, which exclude dividends and interest, also graduated by length of stay. Investments in the newly established, over-the-counter equity market, MESDAQ, were exempted. See Bank Negara Malaysia (1999) for further discussion.

⁷Vector autoregression (VAR) or threshold VAR is useful to analyze transmission lags from capital flows to inflation and its components. The paper did not pursue this exercise, given the small sample size of the data.

⁸Note that this is based only on observation. More thorough econometric exercises may be needed to confirm this. Moreover, during 1999–2005, Malaysia practiced some non-resident restrictions on the property (housing) sector. Some of these rules were progressively relaxed in late 2006 and in 2007.

⁹The third quarter figures were based on the Cash BOP System, where retained earnings and investment in the form of imported machinery and equipment are excluded.

¹⁰Note that the computation of consumer price inflation differs between Table 5 and Table 13. The former combined transport and communication using a weight of 18.8, while the core inflation was 66.2. To focus on the impact of high global crude oil prices on transportation, Table 13 used a weight of 15.9 for transport and core inflation of 68.6. Thus, these figures should be interpreted with caution.

¹¹In order to investigate the impact of capital flows on inflation and the exchange rate, the use of VAR and Granger-causality tests may be needed. This was not possible, given the small time period of the sample concerned.

¹²Note that, due to data limitation, detailed analysis of capital inflows into various sectors of the economy is not possible. The analysis in this subsection uses data based on a cash basis, which differs from the methodology adopted in the Fifth Edition of the Balance of Payment Manual of the IMF. Accordingly, results should be interpreted cautiously.

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