Although emerging market Asian economies have experienced high growth without crises for close to a decade, many commentators find the large buildup of foreign exchange reserves among these economies both puzzling and evidence of incipient global imbalances. This paper reviews some of the experiences of Asian countries over the last decade. We focus on the degree to which Asian economies have experienced financial globalization, meaning that their gross external asset and liability positions have grown significantly. In particular, while Asian economies have become significant gross creditors in bonds and other fixed income assets, their liability position in equity and foreign direct investment assets has also grown significantly. We show that a simple dynamic general equilibrium model of portfolio choice in an emerging market economy can account for this trend remarkably well.
Keywords: Asia; Financial globalization; Foreign direct investment; Foreign exchange rate reserves
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.