RDP 9506: The Liberalisation and Integration of Domestic Financial Markets in Western Pacific Economies 2. The Money Market and Institutional Markets

Markets in traded wholesale financial assets in the Western Pacific region are generally well integrated with world markets in the sense that arbitrage trade can be, and is, conducted between them, and that foreign interest rate shocks have a direct and often substantial effect on domestic money market rates (Chinn and Frankel 1994a, 1994b; Glick and Moreno 1994; de Brouwer 1995). In short, money market centres in the region are integrated internationally.

These tests, however, are narrow since they only apply to a quite limited range of assets, namely traded wholesale assets. While interest rates on traded assets affect the macroeconomy directly via the exchange rate, their broader effect on consumer and producer choice and hence national income depends on how they affect intermediated interest rates. As shown in Table 1, domestic deposit and bank loan markets are often considerably larger than domestic money markets[3] in Western Pacific economies. At least until the 1990s, most economies in the region could generally be characterised as heavily reliant on bank deposits for the domestic mobilisation of funds and on bank credit for external finance. Furthermore, access to private capital through the stock market or corporate bond issuance has generally been restricted, though again, this constraint has eased somewhat in the 1990s.

Table 1: Deposit, Loan and Money Markets in the Western Pacific Region
Country Deposits/GDP Loans/GDP Money Market/GDP
Australia 0.56 0.69 0.27
Indonesia 0.37 0.44
Hong Kong 1.05 1.20 0.71
Japan 1.02 1.19 0.22
Korea 0.38 0.58 0.19
Malaysia 0.77 0.75 0.30#
Philippines 0.36 0.27 0.98#
Singapore 0.82 0.89 0.40#
Taiwan 0.90 0.83 0.15#
Thailand 0.69 0.73 0.02#
Unweighted average 0.69 0.76 0.36
Canada 0.57 0.60 0.10
US 0.49 0.61 0.59

Notes: as at 19930 except # which signifies 1989 data. Deposits include demand, savings and time deposits placed with banks (IMF code 24 and 25) (including thrifts in the case of the US). Loans are bank credit to the private sector (IMF code 22).

Source: IMF IFS bank statistical bulletins, Emery (1991).

Moreover, when covered and uncovered interest parity tests were being developed, they were regarded as relevant to policy precisely because the money market rates used were regarded as being closely linked to other rates in the financial system, such that the tests could be used to draw general conclusions about financial integration. Prachowny (1970), for example, tested covered interest parity by using deposit and loan rates. More recently, when Marston (1993) tested parity relationships for the G7 countries, he first used prime rates and then used euro rates to demonstrate the effect of capital controls. The interest parity tests can still be applied to the Western Pacific economies, of course, but the additional step must be taken to assess whether the integration of money markets does indeed signal broader, more fundamental financial integration.


The money market is defined as the market for traded financial instruments with a maturity of less than one year. The particular instruments which are included varies by country and this paper follows the definitions outlined by Emery (1991) where relevant. The Australian money market includes bank placements with authorised money market dealers, bank bills (BBs), Treasury notes (TNs), negotiable certificates of deposit (NCDs) and promissory notes (PNs). The Hong Kong market includes interbank loans, commercial paper (CPs) and floating rate notes (FRNs), NCDs, bankers' acceptances (BAs) and bills of exchange (BEs). The Indonesian market includes interbank loans, NCDs, CPs, repurchase agreements (RAs), SBIs (sertifikat bank Indonesia or Bank Indonesia certificates) and SBPUs (surat berharga pasar uang or money market securities). The Japanese market includes call loans and bills, NCDs, CPs, gensaki or bond repurchases (BRs), financial bills (FBs) and treasury bills (TBs). The Korean market includes monetary stabilisation bonds (MSBs), CPs, RAs, NCDs, and TBs (interbank data not available). The Malaysian market includes NCDs, TBs, interbank loans, BAs, and discounts (RPs not available). The Philippine market includes interbank loans, TBs, PNs, CPs and RAs. The Singaporean market includes interbank loans, commercial bills (CBs), TBs and NCDs. The Taiwan market includes TBs, NCDs, CPs and BAs (interbank data not available). The Thai market includes interbank loans, TBs and BRs (CBs, CPs and BEs data not available). The Canadian market includes TBs, BAs, CPs and sales finance and consumer loan company paper (interbank data not available). The US market includes interbank loans, TBs, CDs, mutual fund shares, money market fund shares and security repurchase agreements. [3]