Fiscal Uncertainty and Currency Crises

Fiscal deficits have been put forward as the main factor in the occurrence of currency crises by the first‐generation currency crisis models. While most papers within this framework consider a fiscal deficit that occurs with certainty, in reality an increase in the government's fiscal burden may be an uncertain outcome. This paper introduces a model where there is uncertainty about the occurrence of a fiscal deficit for a finite number of periods, and studies the effects of such uncertainty on the evolution of currency crises. If the fiscal deficit materializes, the government has to abandon the fixed exchange rate regime, as in the standard case. However, the paper shows that the peg becomes unsustainable even if the fiscal deficit never materializes. Therefore, a speculative attack occurs and the fixed exchange rate regime collapses with the mere possibility of a deficit, independently of whether this outcome actually occurs or not.     

放弃成本、政府偏好与资本控制:一个审慎的机会主义汇率制度选择模型

本文在Obstfeld(1 996)第二代货币危机模型的基础上 ,建立了一个考虑经济结构、供给冲击以及金融风险的多因素汇率制度选择模型 ,以成本分析为工具解释了资本控制、各类成本和政府偏好对均衡的影响以及对汇率制度选择的影响。研究表明 :(1 )资本控制可以通过多种途径对均衡产生影响 ,在一定条件下可以利用资本控制措施使经济避免多重均衡 ;(2 )放弃成本对汇率制度选择发挥关键作用 ;(3 )较大的政府偏好促使政府选择固定汇率制度 ,在放弃成本不足够大的条件下 ,决策者也可以通过提高政府偏好或者实施资本控制措施来保护本国固定汇率制度 ;(4)对人民币现行汇率制度的放弃成本的估计表明 ,当前人民币汇率制度放弃成本正处于中间水平 ,因此有必要增大政府对固定汇率制度的偏好并且对资本帐户实施适度管理以保持人民币汇率的稳定 ,防范金融风险。至于未来人民币汇率波动幅度的扩大、资本项目自由化的进程以及人民币汇率制度何时回归真正的“管理浮动” ,应主要取决于人民币汇率制度放弃成本的有效降低     

MONETARY CREDIBILITY VS. VOTER APPROVAL: POLITICAL INSTITUTIONS AND EXCHANGE‐RATE STABILIZATION DURING CRISES

This paper analyzes how political institutions affect the execution of exchange‐rate policy. By focusing on policy‐makers' responses to the emergence of speculative pressure on their currencies, we argue that the effect of democratic institutions on exchange‐rate stability is likely to be conditioned by the officially announced exchange‐rate regime. Officially fixed exchange rates are the main instrument of autocrats to signal commitment to long‐term stability. Autocratic governments with strictly fixed exchange rates are thus more likely to defend their exchange rates than autocrats with an intermediate regime because the latter implicitly signal that they care less about monetary stability. In contrast, democrats defend more often in intermediately than in fully fixed official regimes by using a combination of external and internal adjustments, which reduce the negative effects of a devaluation on voters. Our analysis of 189 currency crises between 1975 and 1999 supports this conditional effect.     

Exchange Rate Regimes and Currency Crises: an Evaluation using Extreme Value Theory*

We test whether the exchange regime in place has an impact on the vulnerability of countries to currency crises. Our paper is distinguishable from others (i) in its use of extreme value theory to identify currency crisis periods and (ii) in using two separate designations for the exchange regime in place. The first is the self‐reported or announced exchange rate system. The second classification scheme, by Levy‐Yeyati and Sturzenegger, is based on the relative movements of international reserves and exchange rates. The Levy‐Yeyati and Sturzenegger procedure is intended to reveal the actual as distinct from the “legal” exchange arrangement. We find, interestingly, that the announced exchange regime has an impact on the likelihood of currency crises, while the “true” or observed regime does not. Announced pegged exchange regimes increase the risk of currency crisis even if, in reality, the exchange rate system in place is not pegged.     

关于货币危机后经济衰退的经验分析

文章以1990年以来的近200次货币危机为样本,对货币危机后的经济衰退进行了经验分析.研究发现,危机前的经常账户状况、外债余额占GDP比例、国际流动性指标等经济变量以及危机后的汇率制度都不会显著影响到危机后的经济衰退.另外,危机后的经济衰退与危机国政府在危机中是否抛售外汇储备、是否采取汇率贬值都没有明显关系.但是经济分析的结果表明,危机前的失业率和汇率制度以及危机中是否提高利率等因素对危机后的经济衰退有显著作用.     

The Devil you Know: Pegs vs Floats with Uncertain Outcomes

Theory predicts that a fixed exchange rate regime will be abandoned after a sizable economic shock as currency devaluation could stimulate exports and output. However, devaluation is risky as the new level of the exchange rate and the rate of inflation cannot be predicted. We show that this uncertainty creates resistance to devaluation. Policymakers prefer to maintain the fixed exchange rate and to undergo internal adjustment. We illustrate the point theoretically and provide supporting evidence from Bulgaria's currency board.     

Government guarantees and self-fulfilling speculative attacks

We develop a model in which government guarantees to banks’ foreign creditors are a root cause of self-fulfilling twin banking-currency crises. Absent guarantees, such crises are not possible. In the presence of guarantees banks borrow foreign currency, lend domestic currency and do not hedge the resulting exchange rate risk. With guarantees, banks will also renege on their foreign debts and declare bankruptcy when a devaluation occurs. We assume that the government is unable or unwilling to fully fund the resulting bailout via an explicit fiscal reform. These features of our model imply that government guarantees lead to self-fulfilling banking-currency crises.     

Exchange rates,inflation and growth in small,open economies: a difference-in-differences approach

Financial crises in emerging markets have led many observers to recommend abandoning fixed exchange rates and adopting more flexible regimes. Moreover, some recent research suggests that the correct exchange rate regime may have a significant effect on inflation and even economic growth. The estimated effect found in such studies, however, likely suffers from an upward bias, as countries which choose a given exchange rate regime have other hard-to-measure policies and attributes which also affect economic performance. Utilizing a recent data set on actual, as opposed to official exchange rate regimes, this article employs the difference-in-differences method, currently popular in applied microeconomics, to a set of emerging markets that switched to more flexible currency policies. Results indicate that, contrary to previous studies, exchange rates themselves exert no significant impact on inflation or output.     

From Fixed to Float: A Competing Risks Analysis

This paper examines the determinants of the exchange rate regime of a country. A competing risks model is estimated. It is found that the way a country exits a fixed exchange rate regime is affected non-linearly by the duration of the peg. In addition, countries with a lower growth rate of reserves, higher occurrence of banking crises, higher concentration of trade and lower degree of capital-account liberalisation are more likely to experience a crisis-driven exit.     

Fiscal Discipline and Exchange Rate Systems

A new 'fiscal' theory of price determination has implications for exchange rate systems and common currency areas. We show that deeper monetary integration requires the discipline of a Ricardian regime ; that is, the government must guarantee fiscal solvency for any sequence of prices or exchange rates. Particularly striking results are that a currency peg is not credible without the discipline of a Ricardian regime, and a common currency area is not viable if fiscal policy in two (or more) of the countries in the union is Non-Ricardian. Interestingly, constraints written into the Maastricht Treaty are sufficient for a Ricardian regime.     

体制转换模型能预测货币危机吗?

本文以名义汇率月变化率为因变量 ,引入因变量一阶自回归过程对Abiad(2 0 0 3 )提出的变动概率体制转换模型进行了修改 ,以此为基础 ,采用改进后的模型对阿根廷等 1 2个国家或地区在 1 978年 1月至 2 0 0 2年 5月期间发生或可能发生的货币危机进行了研究。本文主要回答两个问题 :根据体制转换模型建立的货币危机预警系统是否具有更强的预警能力 ?它预测危机发生的时机是否更准确 ?研究表明 :变动概率体制转换模型能够较为准确地预测货币危机发生的可能性和发生的时点 ;但是 ,对于不同的国家或地区 ,模型的预警效果有高有低 ;总体而言 ,该模型的预警能力很强 ,预警时效性较强     

On the relevance of exchange rate regimes for stabilization policy

This paper assesses the relevance of the exchange rate regime for stabilization policy. Using both fiscal and monetary policy, we conclude that the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms. The only relevant conditions are on the mobility of labor and financial assets. The results can be summarized with the claim that every currency area is an optimal currency area. However, with labor mobility or tradable state-contingent assets, additional policy instruments would be required to establish the irrelevance result.     

The policy (in)effectiveness of government spending in a dependent economy

This paper analyses the policy effectiveness of government spending in a two-sector open economy whose output and expenditure is comprised of tradables and non-tradables. This framework reveals that government spending on either tradables or, more normally, on non-tradables widens the external deficit, yet how the real exchange rate behaves depends, in the first instance, on in which sector the public spending occurs. It also shows that, irrespective of where government spending falls, there appears to be no significant short run boost to overall output and hence employment a priori, although empirically actual impact would depend on the elasticities of tradable and non-tradable output with respect to the real exchange rate. Furthermore, fiscal stimulus is shown to be unambiguously ineffective if deemed unsustainable by foreign lenders, or implemented under a fixed exchange rate regime with limited capital mobility.     

Capital inflows, fiscal discretion, and exchange rate policy

Many writers have argued for the benefits of a credible fixed exchange rate (a hard peg) as a commitment device in an open economy. But historically, fixed exchange rates have often been associated with large current account deficits and episodes of ‘over-borrowing’. This paper develops a model of capital inflows that are linked to the exchange rate regime because of endogenous fiscal policy. The key message of the paper is that a hard peg is undesirable in the absence of commitment in fiscal policy. In face of a credible fixed exchange rate, the fiscal authority subsidizes capital inflows. The economy will engage in inefficiently high international borrowing, and in welfare terms may end up worse off than under capital market autarky. To eliminate the incentive to subsidize borrowing, the monetary authority must follow a flexible exchange rate rule in which capital inflows lead to exchange rate appreciation. If fiscal policy must be financed by money creation rather than direct taxation, then a fixed exchange rate rule may cause both over-borrowing and a subsequent exchange rate crisis.     

Currency Crises, Monetary Policy and Corporate Balance Sheets

Abstract. This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crises as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increases the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effect on the probability of crisis is ambiguous.     

How can a strong currency or drop in oil prices raise inflation and the black-market premium?

Based on the case of Venezuela, an oil exporter with a multiple exchange rate regime, this paper explains two counterintuitive phenomena. First, a fall in oil revenue can drive a steep rise in inflation by reducing foreign exchange for imports and raising the fiscal deficit financed by money growth. Second, when foreign exchange is rationed, a devaluation of the official exchange rate could produce a transitory fall in inflation by reducing the fiscal deficit and subsidies for buying foreign exchange. The paper also shows that the black market exchange rate can be rising far faster than overall inflation if it is driven by prices in the most distorted goods markets. The channels emphasized in this paper for determining inflation and the black market exchange rate are novel in the literature and may provide avenues of future research on commodity exporters and foreign exchange constraints.     

Explaining ERM realignments: Insights from optimising models of currency crises

This paper attempts to provide empirical evidence on the determinants of the realignments throughout the European exchange rate mechanism (ERM). Motivated by the implications of optimising currency crisis models, we relate the probability of “crises” to a set of macroeconomic fundamentals. By using a conditional binominal logit model we show that regime switches are strongly influenced by movements in industrial production, foreign interest rates, competitiveness and imports as well as in foreign exchange reserves. These findings are consistent with the general propositions of recent currency crises models.     

Fixed Exchange Rates and Banking Crises: When Does the Former Prevent the Latter?

Because monetary policy is constrained in fixed exchange rate regimes, banks should expect fewer money‐financed bailouts and therefore manage their risks more carefully when exchange rates are fixed than when they are flexible. It follows that we should observe fewer banking crises in countries with formal currency pegs. The 1990s however are littered with occurrences of banking crises in countries with fixed exchange rates. This paper asks whether banks in those countries could have adopted excess risk expecting money‐financed bailouts or whether their pegs discouraged such moral hazard‐type risks.     

Explaining Russia's Currency and Financial Crisis

The paper attempts to sketch a framework for understanding Russia's August 1998 financial and currency crises with reference to the main theories put forward so far. Our thesis is that, while not fitting easily into any pre-existing framework, the Russian crises shares many features of first-generation models inasmuch as it was largely due to inconsistencies among an overvalued peg, tight money, and an evident inability to address the fiscal deficit. In other terms, it derived from the incompatibility between standard IMF stabilisation policies and the difficulties that Russia was facing as a transition economy. On the other hand, by touching both currency markets and the banking sector, the Russian Episode shares also important features of the twin crises framework.The analysis considers the role of exchange rate movements and capital flows on Russia's rising vulnerability, fiscal problems and the building up of the public debt. It assesses the state of the Russian Banking sector and discusses the contagion effects of the Asian crisis and policy response. It shows how the core of the Russian crises lies in an unsound, IMF-backed, defence of the rouble, which in 1998 had become increasingly unsustainable.     

Measuring Exchange Rate Uncertainty: The Case of the Australian Dollar 1969 to 1987

In this article indices of exchange rate uncertainty are measured from the perspective of potential impacts on trade flows. Empirical evidence based on movements in the Australian dollar spot rates and forward rates indicates that there has been an increase in currency risk between 1969 and 1987, which is not surprising given the progressive relaxation of the exchange rate regime during this period. More surprising is the finding that exchange rate uncertainty indices have risen relative to domestic financial price uncertainty indices. This would not have been expected to occur if increased currency risk had been solely due to growing instability of the underlying economic environment. However, since there is evidence that currency risk has been offset by domestic risk, the risk burden of diversified international traders may not have been adversely affected.