ESSAYS ON FINANCIAL LIBERALIZATION IN EAST AND SOUTHEAST ASIA (MALAYSIA, JAPAN, MONETARY POLICY, POLITICAL ECONOMY)

Based on the failures of stabilization and economic reform programs in Latin America, the so-called "sequencing theory" argues that a country should maintain capital controls until the completion of its domestic financial liberalization process. In contrast, many countries in East and Southeast Asia have achieved relatively high rates of economic growth despite having removed their capital controls well before initiating domestic financial reform programs.; The first two essays of this dissertation provide alternative frameworks, which are different from the "sequencing theory," to analyze the optimal order of financial liberalization in a country whose economy is stable. In particular, they try to explain why some Asian countries implemented their financial liberalization programs in the reverse order.; The first essay examines the order of financial liberalization as a strategy to accelerate economic growth. In an economy whose system of tax collection is not well developed, financial repression can be used as an additional source of government revenues. If the revenue is spent on productive government services, it will raise the marginal product of capital, which, in turn, will attract capital inflow when international capital mobility is allowed. In this scenario, the government can accelerate the domestic capital formation by relaxing capital controls while repressing the domestic financial system. The above argument is demonstrated through a neoclassical growth model, with financial intermediaries and capital flow, and is supported by the Malaysian experience during the past two decades.; The second essay looks at the optimal order of financial liberalization from a political economy perspective. It presents a simple framework to analyze the tradeoff between government revenues and deadweight loss associated with the government's decision on each financial policy. Also, it demonstrates that both government revenues and deadweight loss played significant roles in determining the reverse order of financial liberalization in Japan and in determining the sluggishness of financial reform in Korea during the early 1980s.; On a somewhat different topic, the third essay examines the effects of financial liberalization on central bank conduct of monetary policy. Through a portfolio balance model, it explains how financial liberalization affects the distribution of wealth and the elasticities of asset demand. Because of the changes in the structure of asset demand, the model argues in favor of targeting the exchange rate, as opposed to targeting an interest rate or a monetary aggregate, during a process of financial reform. The essay also demonstrates that the Bank of Japan had difficulty targeting other variables, and hence switched towards targeting the exchange rate during the period of extensive financial liberalization in the second half of the 1980s.