nep-ifn New Economics Papers
on International Finance
Issue of 2009‒10‒10
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. On-Going versus Completed Interventions and Yen/Dollar Expectations - Evidence from Disaggregated Survey Data By Yushi Yoshida; Jan C. Rülke
  2. Stability of East Asian Currencies during the Global Financial Crisis By Junko Shimizu; Eiji Ogawa
  3. Current Accounts in a Currency Union By Emil Stavrev; Jörg Decressin
  4. The Intertemporal Relation between Expected Return and Risk on Currency By Turan Bali; Kamil Yilmaz
  5. Balance of Payments Anti-Crises By Michael Kumhof; Isabel K. Yan
  6. The Persistence of Capital Account Crises By David Hofman; Ruben Atoyan; Mauro Mecagni
  7. The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'? By Joshua Aizenman; Yi Sun

  1. By: Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University); Jan C. Rülke (Otto Beisheim School of Management, WHU)
    Abstract: This paper analyzes the effectiveness of Bank of Japan interventions between November 1995 and December 2004. We follow the methodology proposed by Fatum and Hutchison (2006) to determine the success of intervention by measuring prior and posterior exchange rate movements. Conditional on the successful intervention activities, we examine the impact of interventions on exchange rate expectations of market participants using the Foreign Exchange Consensus Forecasts poll in a panel data framework, rather than only focusing on sample average and variance of forecasts. Compared to the existing literature, which argues that interventions have, if at all, only very short-term effects on the exchange rate, we also find medium-term effects of interventions on exchange rate expectations.
    Keywords: Bank of Japan; Central bank intervention; Forecasts; Exchange rate expectations; Successful intervention
    JEL: F31 G15
    Date: 2009–10
  2. By: Junko Shimizu; Eiji Ogawa
    Abstract: In this study, we investigate the movements of the nominal effective exchange rates (NEER) of East Asian currencies and the Asian Monetary Unit (AMU), which is the weighted average of East Asian currencies, during the course of the global financial crisis. We found that the NEER were more stable in countries that adopted the currency basket system even during the financial crisis. Comparisons made between the NEER and a combination of the AMU and AMU Deviation Indicators show intra-regional exchange rates among the East Asian currencies, and that there have been strong relationships between them before and after the global financial crisis. Accordingly, monitoring both the AMU and the AMU Deviation Indicators is effective in stabilizing the NEER of East Asian currencies. In this respect, our findings indicate that the AMU Deviation Indicators as well as the AMU will play a very important role in the surveillance of the stability of intra-regional exchange rates.
    Keywords: currency basket system, effective exchange rate, global financial crisis, East Asian currencies
    JEL: F31 F36
    Date: 2009–09
  3. By: Emil Stavrev; Jörg Decressin
    Abstract: A fear about EMU was that in the absence of national currencies, country-specific shocks would result in greater current account divergences between member states. This paper finds that divergences across euro-area countries are smaller and have not risen relative to those across 13 other advanced economies with more flexible exchange rates. Also, the size of country-specific current account shocks in EMU countries is smaller and their persistence is greater than in the other advanced economies. However, these differences in current account dynamics do not appear related to different exchange rate dynamics.
    Keywords: Cross country analysis , Current account , Economic models , European Economic and Monetary Union , External shocks , Monetary unions , Real effective exchange rates , Regional shocks ,
    Date: 2009–06–17
  4. By: Turan Bali (Baruch College); Kamil Yilmaz
    Abstract: The literature has so far focused on the risk-return tradeoff in equity markets and ignored alternative risky assets. This paper is the first to examine the presence and significance of an intertemporal relation between expected return and risk in the foreign exchange market. The paper provides new evidence on the intertemporal capital asset pricing model by using high-frequency intraday data on currency and by presenting significant time-variation in the risk aversion parameter. Five-minute returns on the spot exchange rates of the U.S. dollar vis-à-vis six major currencies (the Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar, and Canadian Dollar) are used to test the existence and significance of a daily risk-return tradeoff in the FX market based on the GARCH, realized, and range volatility estimators. The results indicate a positive, but statistically weak relation between risk and return on currency.
    Keywords: Foreign exchange market, ICAPM, High-frequency data, Time-varying risk aversion, Daily realized volatility
    JEL: G12 C13 C22
    Date: 2009–09
  5. By: Michael Kumhof; Isabel K. Yan
    Abstract: Several emerging economies have, until recently, experienced large government surpluses and accelerating foreign exchange reserve accumulation. This has been accompanied by economic booms, exchange rate appreciations and in some cases increases in domestic inflation. We show that one way to understand these episodes is as manifestations of balance of payments anti-crises, as reflecting the perception that the government intends to discontinue its accumulation of reserves in the near future. The end-phase of such crises is characterized by nominal interest rates approaching their zero lower bound in accelerating fashion and, if the government targets CPI inflation, by fast increasing domestic inflation.
    Keywords: Balance of payments , Current account surpluses , Data analysis , Economic models , Emerging markets , Exchange rate appreciation , Fiscal policy , Foreign exchange reserves , Inflation , Monetary policy , Reserves accumulation ,
    Date: 2009–07–06
  6. By: David Hofman; Ruben Atoyan; Mauro Mecagni
    Abstract: This study contributes to the literature on capital account crises in two ways. First, our analysis of crisis episodes between 1994 and 2002 establishes a clear relationship between the persistence of crises, their complexity, and the intensity of movement of key macroeconomic variables. Second, we provide a systematic examination of the determinants of crisis duration. Our econometric analysis suggests that initial conditions and the external environment plays a key role in determining crisis persistence. The policy response also matters, but cannot offset a record of poor past policies. Overall, the results underscore the critical importance of crisis prevention efforts.
    Keywords: Capital account , Capital controls , Capital markets , Capital outflows , Data analysis , Economic models , Exchange rate regimes , External sector , Financial crisis , Fiscal policy , Monetary policy ,
    Date: 2009–05–20
  7. By: Joshua Aizenman; Yi Sun
    Abstract: This paper studies the degree to which Emerging Markets (EMs) adjusted to the global liquidity crisis by drawing down their international reserves (IR). Overall, we find a mixed and complex picture. Intriguingly, only about half of the EMs relied on depleting their international reserves as part of the adjustment mechanism. To gain further insight, we compare the pre-crisis demand for IR/GDP of countries that experienced sizable depletion of their IR, to that of courtiers that didn’t, and find different patterns between the two groups. Trade related factors (trade openness, primary goods export ratio, especially large oil export) seem to be much more significant in accounting for the pre-crisis IR/GDP level of countries that experienced a sizable depletion of their IR in the first phase of the crisis. These findings suggest that countries that internalized their large exposure to trade shocks before the crisis, used their IR as a buffer stock in the first phase of the crisis. Their reserves loses followed an inverted logistical curve – after a rapid initial depletion of reverses, they reached within 7 months a markedly declining rate of IR depletion, losing not more than one-third of their pre crisis IR. In contrast, for countries that refrained from a sizable depletion of their IR during the first crisis phase, financial factors account more than trade factors in explaining their initial level of IR/GDP. Our results indicate that the adjustment of Emerging Markets was constrained more by their fear of losing international reserves than by their fear of floating.
    JEL: F15 F31 F32 F42
    Date: 2009–10

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