Financial crises,exchange rate linkages and uncovered interest parity: Evidence from G7 markets

This paper examines the dynamic linkages among major exchange rates during the Global Financial Crisis and Eurozone Sovereign Debt Crisis. We extend the previous literature on volatility spillover linkages among the currencies by taking into account the uncovered interest-rate parity hypothesis for 2004–2015. The results indicate that the Canadian Dollar and Great British Pound were affected mainly by the US Dollar across the two crises due to strong financial and economic ties among the three economies, while the Japanese Yen shows evidence of a safe-haven currency. We also provide evidence of varying vulnerability of currencies to both crises, implying increased portfolio diversification benefits, since holding a portfolio with diverse currencies is less subject to systematic risk. These results show that the policy makers need to adopt a stricter form of monetary policy coordination among central banks, since the different vulnerability of currencies across turbulent periods reveals possible non-cooperative monetary policies.     

新兴市场国家(地区)本币升值影响因素的国际经验比较

通过对经历或正在面临本币升值压力的主要新兴市场国家(地区)影响本币升值的因素进行国际经验比较分析,我们可以发现,在众多的影响因素中,贸易收支顺差、金融账户顺差和GDP增长率成为引发上述国家(地区)本币升值的主要因素。基于样本国家(地区)面板资料的实证研究为国际经验比较分析提供了证据。以上结论显然对于同样作为新兴市场国家,同时面临人民币升值压力的我国具有重要的借鉴意义。在我国应对人民币升值的政策中,应该优先考虑可能导致上述因素积极变化的政策的制定和实施。     

Bi‐currency versus Single‐currency Targeting: Lessons from the Russian Experience

This paper examines how the 2005 shift in Russian exchange rate policy from US dollar (USD) single‐currency to USD–EUR (euro) bi‐currency targeting has impacted domestic interest rates. The finding show that this policy shift has disconnected Russian interest rates from US dollar‐denominated interest rates, while instead linking them to a synthetic interest rate composed of USD and EUR rates at the same proportion as that of these two currencies in the currency basket against which the ruble's exchange rate is set. The Russian experience shows that while the adoption of bi‐currency targeting may help ensure that domestic interest rates are less dependent on the monetary cycle of a single country, these rates are instead likely to reflect financial developments in all countries whose currencies are included in the currency basket. This insight is likely to be relevant for other countries that pursue basket‐targeting policies.     

Fundamentals versus external shocks: Brazil's growing exposure to currency crises

While financial globalization does not lack theoretical economic merit, the more far-reaching practical consequences of this phenomenon are often not fully appreciated from the vantage point of North America or the European Union. In particular, globalization can make it more difficult for emerging economies to achieve macroeconomic stabilization. This is especially true if the countries in question have chosen the vehicle of pegged exchange rates as an important element of domestic anti-inflation policy. The chief macroeconomic difficulties for emerging economies in a world of volatile capital flows can include a loss of monetary control, a real appreciation of the domestic currency, and a worsening of economic fundamentals leading to damaging currency crises. This paper concentrates on the recent experience of Brazil as illustrative of the abject plight faced by many developing countries attempting to secure economic stabilization against the background of the present globalized international economy.This paper has benefitted from discussion with participants of the Forty-Sixth International Atlantic Economic Conference, Boston, MA, October 8–11, 1998.     

The illusive quest: Do international capital controls contribute to currency stability?

We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975–2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to “depreciate” over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007–2008 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.     

A few observations on financial liberalization and financial instability

Recent studies have conjectured that there may be a link between financial liberalization (FL) and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are, in fact, becoming structurally more vulnerable to currency and banking crises. In this paper, I argue that emerging economies are becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies—excluding transition economies—from 1973 to the present, a univariate analysis indicates that the likelihood of currency crises may increase with stronger reactions to financial variables than to real or external trade variables. Similarly, for banking crises, interest rate, exchange rate, maturity, and default may increase, while simultaneously the support structure of the government seems to decline.     

ONE WORLD, ONE CURRENCY: EXPLORING THE ISSUES

Along with globalization of trade and finance has come a certain globalization of money. Some countries have adopted monetary unions and currency boards; others increasingly use international currencies in place of national monies. This article explores the idea of a global money—framed here as a voluntary, representative arrangement based on accepted principles for optimal conduct monetary policy. It argues that if the current pace of economic and financial integration continues, a global money may emerge that is better adapted to internationalization of production and exchange—although such a change may be a long time in coming. (JEL F330, F360, E420 )     

Choice of currency basket weights and its implications on trade balance

This paper seeks to find an optimal choice of currency basket weights for emerging economies that peg their currencies to a currency basket, and to examine the long-run relationship between the real exchange rates of a group of trading partners. A general equilibrium model is set up to establish an optimal set of currency basket weights, coupled with the choice of fiscal policy, to simultaneously stabilize trade balance and aggregate price level of an economy. This optimal set of weights is a weighted average of two sets of weights; each targets at one policy goal (stabilizing either balance of trade or aggregate price level) at a time. Empirical studies including vector autoregression (VAR) analysis and cointegration analysis on the long-run relationship between the Thai baht and the real exchange rates of its major trading partners are presented.     

Investor attention and currency performance: international evidence

This article investigates the relationship between investor attention measured by Google search volume index and the performance of several currencies. We find that currency performance is remarkably responsive to changes in investor attention. These impacts, generated rapidly, are present over the relatively long term, especially for emerging currencies, and are intensified during periods of high uncertainty. We also demonstrate that there is a prominent asymmetric effect for the impact of attention, as past currency performance also influences attention. Typically, past currency performance can determine the magnitude of the impact on current currency performance. Moreover, we confirm that investor attention has a predictive power for forecasting emerging currency performance in the out-of-sample analysis. Further, these forecasts generate substantial economic value in the framework of asset allocation. By contrast, statistical predictability and economic value do not exist in the currencies from developed markets. These results indicate that investor attention can alter currency performance and its predictability. More broadly, our study emphasizes the potential of employing investor attention for emerging currency performance forecasting applications.     

Currency Boards in the Baltic Countries: What Have We Learned?

Straightforward exchange rate arrangements known as currency boards have gained popularity during the past decade. Among transition economies, Estonia first introduced a currency board in 1992, followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have been useful in achieving macroeconomic stabilisation, and they may have helped the Baltics become the first countries of the former Soviet Union (FSU) to achieve economic growth after the slump in production of the early 1990s. Moreover, Baltic inflation performance has been substantially better than in other FSU countries. Both in Estonia and Lithuania the present exchange rate system has been accompanied by strong real appreciation of the currency, although it is widely accepted that the currencies were very much undervalued when they were initially pegged. However, if rapid real appreciation is accompanied by increases in labour productivity, the present pegs can be maintained. Banking crises in Estonia and Lithuania have not been particularly severe, so apparently rigid currency pegs have not been accompanied by excessive financial sector instability. The tight fiscal policies pursued in both countries, especially Estonia, have been instrumental to the success of these currency board arrangements.     

Theorizing the Financial Statecraft of Emerging Powers

‘Financial statecraft’, or the intentional use of credit, investment and currency levers by the incumbent governments of creditor – and sometimes debtor – states for both international economic and political advantage, has a long history, ranging from money doctors to currency wars. A neorealist, zero-sum framing of international monetary relations is not inevitable, yet casts a persistent shadow especially during periods of prospective interstate power transitions when previously peripheral countries find themselves with unexpected new capabilities. This article seeks to understand and theorise the financial statecraft of emerging economies, moving beyond the traditional understanding that closely identifies the concept with financial sanctions imposed by a strong state on a weaker state. We propose that the aims of financial statecraft may be either ‘defensive' or ‘offensive’. Financial statecraft may be targeted either ‘bilaterally' or ‘systemically’. Finally such statecraft may employ instruments that are either ‘financial' or ‘monetary’. As emerging market economies have moved up in the ranks in the interstate distribution of capabilities, they have also expanded their financial statecraft strategies from narrowly defensive and bilateral to those involving offensive tactics and targeted at the global and systemic level. Historical and contemporary examples illustrate the analysis.     

Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects

This paper develops a three‐currency model to study the determinants of the demand for assets and liabilites denominated in an international currency and to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi's position, while other factors, including the correlation between foreign countries' economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be attractive to investors from high‐income economies and fund‐raisers from emerging market economies.     

TOWARD A REGIONAL EXCHANGE RATE REGIME IN EAST ASIA

Abstract.  Deepening market-driven economic integration in East Asia makes intraregional exchange rate across the region increasingly desirable and necessary. The paper suggests that East Asia's emerging economies begin to choose a currency basket as a monetary policy anchor to enable all East Asian currencies to collectively appreciate vis-à-vis the US dollar, while maintaining intraregional rate stability, in the event of surges of capital inflows or a rapid unwinding of global payments imbalances. Following this initial step, East Asia may agree on more rigid intraregional exchange rate stabilization schemes through, for example, an Asian Snake or an Asian Exchange Rate Mechanism.     

Virtual Currencies,the Money Market,and Monetary Policy

Virtual currencies are in vogue mainly due to two factors. First, as a protest against authority-driven monetary policy decisions and second, as alternatives to deficits in some monetary systems arising out of political instability or other causes. Assuming that virtual currencies indeed (partially) replace national currencies as payment vehicles, we attempt, in this article, to integrate the virtual currency supply and demand into the Keynesian money market framework. This article presents a few results for the central banks and outlines problems that may result for monetary policy formulation. Since this is the first such attempt to model a national money market as a combination of nationally-issued currency and globally-issued virtual currency, certain simplistic assumptions have been made. Nevertheless, the model offers directions on the impact of virtual currencies on the monetary system and the national money market. Additionally, the paper integrates the official standpoints of the European Central Bank and the Bank of England on this topic.     

The new exchange rate policy in the Asian emerging economies – goodbye trouble,hello comfort?

In this paper, we discuss new aspects of exchange rate policy that can be observed in the Asian emerging economies. In the first place, we show the alternative regimes they may choose and their respective pros and cons. Secondly, we concentrate on the recent strategy of systematic undervaluation of one's currency – figuring prominently among ‘big’ Asian players such as China and India – and the most likely implications of such a strategy for domestic allocation, distribution and stabilization goals. With the background of Germany's experiences in 1969, almost on the eve of the Bretton Woods' system collapse, we model a speculative attack on an undervalued currency in the vein of the Flood–Garber seminal paper from 1984. Now, however, the country in concern (just like India and China) possesses strong rather than weak fundamentals. The continuous accumulation of international reserves, in addition, leads to the question of an ‘optimal management’ of foreign exchange reserves in Asian emerging economies with regard to size and composition. We finally propose a sequence of reforms/policies that should be implemented in those Asian emerging economies on their still long journey to a regime featured by autonomous monetary policy, flexible exchange rate and capital mobility. A brief summary and an outlook for future research close the paper.     

后危机时期国际金融格局的变动及其对美国经济的影响

2008年金融危机给世界经济带来了重大的影响,国际金融格局也发生了显著变化。本文主要分析了国际汇率体系、国际收支和国际储备体系、国别经济政策与国际间经济政策协调的变化。在后危机时期,美国经济也受国际金融格局变化的影响,包括美元中心地位的问题、“中心一外围”模式可持续性的问题和美国的国际经济领导权问题。本文得出的主要结论是：国际几种主要货币汇率波动增大,国际汇率体系弹性增大,国际收支总体失衡程度下降,美元为主的国际储备体系呈多元化趋势,先进经济体与新兴发展经济体的经济协调在加强,美元的霸权地位面临挑战,美国在国际分工中的中心地位在下降,美国在国际经济的主导地位也在逐渐下降,新兴经济体获得更多的话语权。     

THE EAST ASIAN CURRENCY CRISIS: CAUSES AND LESSONS

Financial deregulation and capital-account liberalization preceded speculative currency attacks in Thailand. A combination of de facto fixed exchange rates and high rates of interest generated excessive capital inflows, which led to too much liquidity chasing bad investments. The under-supervised and over-guaranteed financial sector extended loans excessively, particularly for non-productive, speculative purposes. Non-transparent practices, in the form of weak disclosure of institutions' true balance sheets and insider relations, masked these poor investments. The buildup of short-term, unhedged debt left East Asian economies vulnerable to a sudden collapse of confidence. Currency attacks ran down official foreign exchange reserves. Rapid capital outflows and the consequent depreciation of currencies exacerbated the strains on private sector balance sheets. The policy lessons are to (i) use macroeconomic policy to avoid excessive capital inflows and currency overvaluation, (ii) strengthen the financial system, with proper disclosure and accounting requirements, stringent loan classification and provisioning rules, and capital adequacy requirements, prior to capital-account liberalization, (iii) stabilize exchange rates based on currency baskets that reflect trade and investment linkages, and (iv) develop regional. financial cooperation with regional surveillance and peer pressure to maintain policy discipline.     

Capital Inflows,Exchange Rate Flexibility and Credit Booms

Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, this paper analyzes the impact of exchange rate flexibility on credit markets during periods of large capital inflows. It is shown that bank credit is larger and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. The findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks' incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency‐dependent liquidity requirements and higher capital requirement and/or dynamic provisioning on foreign exchange loans.     

Macroprudential policy and the inward transmission of monetary policy: The case of Chile,Mexico, and Russia

This paper studies whether domestic macroprudential policy may attenuate the inward transmission of monetary policy shocks from the United States to domestic bank lending growth in three emerging market economies—Chile, Mexico, and Russia. Identification relies on banks’ heterogeneous exposure to prudential policies and the fact that foreign monetary policy shocks are exogenous from the perspective of these economies. After analyzing the effects of the aggregate domestic prudential policy stance, we focus on specific prudential policies targeting mortgage and consumer loans, as well as foreign‐currency deposits. Although our overall results are mixed, we find evidence that the strength of international monetary policy spillovers varies depending on the stance of domestic macroprudential policy. In particular, a tighter reserve requirement stance over foreign‐currency deposits in Chile dampens the effect of an international monetary policy shock on domestic local‐currency lending, but reinforces that on foreign‐currency lending, whereas in Russia, it dampens the effect on both local‐currency and foreign‐currency lending, although to different degrees. Prudential policies targeting the asset side of banks’ balance sheets, such as mortgage loans or consumer credit, are found to amplify international monetary policy spillovers in some cases and attenuate it in others, depending on the country context.     

Financial Trilemma in China and a Comparative Analysis with India

A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the trilemma, in an era of widespread globalization. In this paper we review and contrast the trilemma policy choices and trade‐offs faced by the two key drivers of global economic growth: China and India. China's trilemma configurations are unique relative to other emerging markets in terms of the predominance of exchange rate stability, and in the failure of the trilemma regression to capture a consistently significant role for financial integration. In contrast, the trilemma configurations of India are in line with choices made by other emerging countries. Over time, India, like other emerging economies, has converged towards a middle ground among the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.