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on International Finance |
| By: | Eijffinger, S.C.W.; Goderis, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature. |
| Keywords: | Currency Crises;Institutions;Monetary Policy;Short-Term Debt;External Debt;Capital Account Openness; |
| Date: | 2007–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:300010740&r=ifn |
| By: | W. Max Corden |
| Abstract: | This paper presents a simplified overview of the causes of and policy responses to the East Asian financial crisis, focusing on the four principal countries involved, namely, Thailand, Indonesia, Malaysia and Korea. The main point is that there was a prolonged investment boom in these countries and an ending to the episode in the form of a 'hard landing' was neither inevitable nor predictable, but was set off by events in Thailand and reinforced in Indonesia’s case by political factors. There was a clear relationship between severity of the exchange rate crises and the short-term foreign borrowing that was denominated in foreign currency, usually dollars, and was unhedged. There were several policy responses, notably efforts to rescue the banks and various private corporations. Only in the Korean case was there a systematic attempt to get foreign creditors to reschedule the payments they were owed. There were some special features of each of our four countries. In particular, in Indonesia, there was an interaction of a political with an economic crisis, Malaysia did not incur significant short-term debts unlike the other three countries, while Thailand adhered too long to a fixed exchange rate. |
| Keywords: | Asian crisis, exchange rate policy, foreign capital, currency mismatch |
| JEL: | F20 F40 O53 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pas:papers:2007-06&r=ifn |
| By: | Yap, Josef T. |
| Abstract: | In response to the 1997 East Asian financial crisis many schemes were initiated to reform the international financial architecture. The proposed reforms had two wide-ranging objectives: (i) to prevent currency and banking crises and better manage them when they occur; and (ii) to support adequate provision of net private and public flows to developing countries, particularly low-income ones. Unfortunately the progress has been uneven, asymmetric, and patchy. This is largely because the structural problems related to the supply side of capital flows have not been addressed, particularly the unipolar character of the global financial system. As a result, many East Asian economies face many of the same conditions that prevailed immediately prior to the crisis: huge capital inflows heavily tilted toward hot money, rapid appreciation of currencies in real terms, surging stock prices, and little policy space to implement countercyclical measures in the event of a crisis. The difference is that many countries have accumulated a large amount of foreign exchange reserves but at the expense of domestic investment and economic growth. In order to resolve the problems that are posed by volatile capital flows it is important to accelerate East Asian cooperation and integration, particularly with regard to the objective of using regional savings for regional infrastructure projects. Political rapprochement between China and Japan is a necessary condition both to move regional cooperation and integration forward and to overhaul the unipolar global financial system. |
| Keywords: | capital flows, real effective exchange rate, international financial architecture, disaster myopia |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2007-05&r=ifn |
| By: | Gunther Schnabl (Leipzig University, Marschnerstr. 31, 04109 Leipzig, Germany) |
| Abstract: | Since the introduction of the euro in January 1999, exchange rate stability at the periphery of the euro area is growing. The paper investigates the impact of exchange rate stability on growth for a sample of 41 mostly small open economies at the EMU periphery. It identifies international trade, international capital flows and macroeconomic stability as important transmission channels from exchange rate stability to more growth. It is argued that fixed exchange rates provide a more stable framework for the adjustment of asset and labour markets of countries in the economic catchup process thereby accelerating growth. Panel estimations reveal a robust negative relationship between exchange rate volatility and growth for countries in the economic catch-up process with open capital accounts. JEL Classification: F43, F31, E42. |
| Keywords: | Exchange Rate Regimes, Exchange Rate Volatility, Growth, EMU Periphery, International Role of the Euro. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070773&r=ifn |
| By: | Akihiko Takahashi (Faculty of Economics, University of Tokyo); Kohta Takehara (Graduate School of Economics, University of Tokyo) |
| Abstract: | This paper develops a Fourier transform method with an asymptotic expansion approach for option pricing. The method is applied to European currency options with a libor market model of interest rates and jump-diffusion stochastic volatility models of spot exchange rates. In particular, we derive closed-form approximation formulas of the characteristic functions of log-prices of the underlying assets and the prices of currency options based on a third order asymptotic expansion scheme; we use a jump-diffusion model with a mean-reverting stochastic variance process such as in Heston[1993]/Bates[1996] and log-normal market models for domestic and foreign interest rates. Finally, the validity of our method is confirmed through numerical examples. |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2007cf497&r=ifn |
| By: | Anella Munro; Rishab Sethi (Reserve Bank of New Zealand) |
| Abstract: | In this paper we use a small open economy model to identify the causal factors that drive New Zealand's current account. The model features nonseparable preferences, habit in consumption, imperfect capital mobility, permanent productivity shocks, fiscal shocks and two foreign shocks to explore features that are important in understanding the dynamics of the current account. The results suggest that permanent technology shocks and world cost of capital shocks account for the bulk of variation in the current account at short horizons; at longer horizons, external valuation shocks (reflecting terms of trade and exchange rate developments) account for most of the variance. Habit in consumption and a debt-sensitive risk premium are features that improve overall model it as measured by posterior odds ratios. These features, and the contribution of foreign and permanent technology shocks, help to explain why the one shock present value model of the current account fails to appropriately characterise the dynamics of the New Zealand current account, as discussed in Munro and Sethi (2006). |
| JEL: | C51 E52 F41 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2007/10&r=ifn |