Abstract
In this paper we examine vulnerability to painful financial account contractions using a large panel data set and draw out the results for twelve Asia Pacific countries. Overall these countries were estimated to be substantially less vulnerable to a painful financial account contraction in 2005 than in 1996, even without accounting for a rise in the stock of reserves. Contributing factors vary by country, but include smaller private net capital inflows and larger reserve outflows (both imply a smaller investment-savings gap), and more flexible exchange rates. These gains are offset to some degree by increased financial openness which increases vulnerability. The potential for regional contagion, while still important, is estimated to have diminished. Lower vulnerability in individual countries implies both a lower probability of a crisis in the region and lower susceptibility to regional contagion, should another regional country experience a painful financial contraction. The analysis reinforces the notions that financial flows matter and that more stable financial flows, such as direct investment, are less risky. The protective effect of international reserve accumulation that has been common in Asia is not estimated to be significant. We consider several explanations for this result.
