The relatively better growth prospects have meant that many investors have chosen to invest their capital in the United States, where the expected return is higher than in, for example, Europe. This has led to a capital flow that has strengthened the dollar, which has contributed to reducing net exports and thereby increasing the current account deficit. Expectations of increased income have also contributed to subduing saving by US households. Another explanation is that the deficit is a result of the domestic policy in the United States. The expansionary economic policy has contributed to reducing saving both among households and in the public sector, which has stimulated consumption and growth. A third explanation points out Asia’s structural saving surplus as the driving force behind the imbalances. Private saving is generally at a high level in Asia. This applies in particular to the emerging economies, but Japan also has substantial private saving. Following the financial crisis in Asia in 1997, there was a correction of the earlier investment bubble, and the investment ratio fell from very high levels. The exception is China, where both saving and investment have increased substantially. The increased saving has to a great extent been invested in US bonds, which has pushed down longterm interest rates in the United States an further stimulated US household consumption. Approximately two thirds of saving in the world is currently channelled to the United States.
It allows the intermediation process to proceed uninterrupted when the banks are temporarily in difficulty. But more importantly, it helps with liquidity management. In the case of Thailand, the government throughout the 1980’s had been very disciplined in their fiscal policy. They maintained balanced budgets in most years. As a result, no new government bond was issued, as old ones were being retired. Without a deep and liquid government bond market, growth of corporate bond was also slow. When the crisis erupted, financial institutions that could not seek liquidity from the inter bank market were stuck without liquid instruments in hand. Some of them might have survived had the bond market been more active. After the crisis, the government had to issue massive amount of bonds to cover losses in the financial system. Today, the Thai bond market is therefore much larger, at 38 % of the GDP. We have a much more active market. What does an active bond market mean to monetary policy? I will highlight three points. First is the implication on transmission mechanism. When the central bank wants to change stance in monetary policy, it changes interest rate up or down. But it does not directly change the interest rates along the whole spectrum of the yield curve. It only affects the key policy rate, which in the case of Thailand is the very short-term 14 day rate in the repurchase market.