nep-ifn New Economics Papers
on International Finance
Issue of 2008‒12‒01
two papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Does the currency regime shape unhedged currency exposure. By Patnaik, Ila; Shah, Ajay
  2. Demand For International Reserves in ASEAN-5 Economies By Eliza, Nor; M., Azali; Law, Siong-Hook; Lee, Chin

  1. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time- periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less flexible. We also find homogeneity of views, where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees.
    Keywords: Currency regime ; Currency exposure of firms ; Moral hazard ; One-way bets on exchange rates
    JEL: F31 G32
    Date: 2008–04
  2. By: Eliza, Nor; M., Azali; Law, Siong-Hook; Lee, Chin
    Abstract: The ASEAN-5 economies were observed to increase their demand for international reserves after the 1997 Asian financial crisis. This was coincided with their consistent current account surplus during the same period. Thus, this study attempts to investigate the existence of long-run relationship between reserve demand and current account for the period of 1997-2005. The Autoregressive Distributed Lag (ARDL) bounds test approach as proposed by Pesaran, Shin, and Smith (2001) was employed, and the empirical results revealed that current account surplus leads to the rise in the demand for international reserves in Indonesia, Malaysia, and Singapore.
    Keywords: Bound Test; ARDL Approach; International Reserves; ASEAN-5
    JEL: F3 C22
    Date: 2008

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