Financial crises and time-varying risk premia in a small open economy: a Markov-switching DSGE model for Estonia

Under a currency board, the central bank relinquishes control over its monetary policy and domestic interest rates converge towards the foreign rates. Nevertheless, a spread between both usually remains. This spread can be persistently positive due to elevated risk in the economy. This paper models that feature by building a DSGE model with a currency board, where the domestic interest rate is endogenously derived as a function of the foreign rate, the external debt position and an exogenous risk premium component. Time variation in the volatility of the risk premium component is then modelled via a Markov-switching component. Estimating the model with Bayesian methods and Estonian data shows that the economy does not react much to shocks to domestic interest rates in quiet times but is much more sensitive during crises, and matches the financial and banking crises, which cannot be captured by the standard DSGE model.     

银行危机与货币危机共生性关系的实证研究

1 997— 1 998年的亚洲金融风暴中 ,银行危机与货币危机的同时爆发 ,即共生性危机的发生引发国际社会与学术界对这种现象的重新思考 :这种共生性现象是否确实具有普遍性 ?从理论的角度来看 ,银行危机与货币危机之间的确存在着一定的联系 ,但到目前为止 ,很少有研究从实证的角度来证明这种联系的确存在。正是基于此 ,本文从实证的角度出发 ,旨在揭示出银行危机与货币危机之间的确存在着相互影响 ,换言之 ,共生性危机的发生是具有显著性的。具体来说 ,本文以 1 975— 2 0 0 0年期间 53个国家危机的发生情况为研究对象 ,分别运用频率分布、信号法 ,以及概率回归模型来分析两种危机的共生性 ,并得到非常一致的结论 :在新兴市场国家中 ,银行危机与货币危机之间的确存在着明显的相互关系 ,同时银行危机更趋向于作为货币危机即将发生的同步或预警指标 ,而反之则不然。     

防治货币危机的政策措施

本文对预防与应对货币危机的各种政策措施进行探讨。货币危机发生的原因是多方面的 ,其对经济的发展具有诸多不利的影响。要预防货币危机 ,良好的经济基础是根本的保障 ,市场参与者的信心同样是重要的。应急性政策措施必须与基础性政策措施相结合 ,才能消除危机。     

Transparency and currency crises

The role transparency plays in the prevention of currency crises is widely acknowledged. Nevertheless, the relationship between transparency and currency crises has rarely been subjected to systematic cross‐national scrutiny. This paper attempts to explore the effect of transparency on currency crises by focusing on a specific dimension of transparency: the public dissemination of aggregate economic data by governments. My analysis provides strong evidence that greater transparency is associated with a lower likelihood of currency crises, regardless of economic conditions. When I add economic and political determinants of currency crises, the estimate of transparency remains unaltered in magnitude or statistical significance.     

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.     

Debt and Currency Crises—Complements or Substitutes?*

Debt and currency crises are closely interlinked through the government's intertemporal budget constraint. The default tax and the inflation/devaluation tax can be considered as alternative means of financing. Our empirical analysis finds that high‐debt countries choose default rather than inflation/devaluation for financing, while a high money stock reduces the probability of debt crises. Further, we find strong evidence that debt and currency crises share common fundamental causes. Finally, there is a Granger causality running from debt crises to currency crises, but only weakly in the other direction.     

Political booms and currency crises

This paper shows evidence that political booms, defined as the rise in governments’ popularity, are associated with a higher likelihood of currency crises. The reasoning behind this finding is that prudent economic policies to address underlying weaknesses in the economy may be political costly for incumbent governments in the short-term. Hence, popularity-concerned governments may not have enough incentives to take such corrective actions in a timely manner. This approach, in turn, can deteriorate economic fundamentals and increase related risks in the economy which can eventually lead to crises. This paper sheds light on this phenomenon in the case of currency crises, suggesting that currency crises can be viewed as “political booms gone bust” events. Moreover, it finds that higher international reserves, higher exports, and a higher degree of financial openness alleviate the effect of political booms on currency crises.     

Political Regimes and Currency Crises

This paper examines the relationship between political regime type and currency crises. Some theories suggest that democratic regimes, owing to their greater political transparency and larger number of veto players, should have a lower risk of currency crisis than dictatorships. Alternative arguments emphasize the advantages of political insulation and rulers with long time horizons, and imply that crises should be most likely in democracies and least common in monarchic dictatorships. We evaluate these competing arguments across four types of political regimes using a time‐series cross‐sectional dataset that covers 178 countries between 1973 and 2009. Our findings suggest that the risk of currency crisis is substantially lower in monarchies than in democracies and other types of dictatorship. Further analyses indicate that the adoption of prudent financial policies largely account for this robust negative association between monarchies and the probability of currency crises. This suggests that political regimes strongly influence financial stability, and perverse political incentives help explain why currency crises are so common.     

货币危机与银行危机共生因子实证分析——国别比较的视角

共生危机的事实表明,货币危机与银行危机共生的现象在不同类型的国家均可能出现,而非某一类国家所特有的现象.基于对共生性货币银行危机触发机制国别差异的考察,文章在对1980～2006年间60个国家共生危机发生情况识别的基础上,分别构建了工业化国家和发展中国家共生危机生成的逐步Logistic回归模型.研究表明,工业化国家的共生危机主要是经济中各类矛盾累积的结果,发展中国家则主要源于本国制度缺陷,而采用滞后一期的变量来解释工业化国家共生危机时,效果不显著.     

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.     

Speculative attacks and defenses as wars of attrition

This paper extends the currency crisis models in Obstfeld [Obstfeld, M., 1994. The logic of currency crises. Cahiers Economiques et Monetaries], [Obstfeld, M., 1996. Models of currency crises with self-fulfilling features. European Economic Review 40, 1037–1047] by modeling both the government's side and speculators' side and introducing uncertainty about each party's payoff. We argue that a speculative attack (defense) can be well modeled as a war of attrition between the government and speculators under asymmetric information. We then solve for a pure strategy, weakly perfect, Bayesian rational expectation equilibrium in which each party's time until concession depends on her benefits from winning and her costs of fighting. Using this model, we are able to explain important facts of currency crises. First, the model shows that failed defenses (attacks) can be ex-ante rational for governments (speculators). Second, the model predicts systematic variations in the durations of defenses. Finally, we also show that currency crises can be self-fulfilling in the sense that there exist multiple rational expectation equilibria in our model.     

The Asian Currency Crises: Vulnerability, Contagion, or Unsustainability

The Asian currency crises have been introduced by many economists as evidence that almost any country could be vulnerable to speculative attacks and to contagion effects, even with apparently good economic fundamentals. These financial crises have also been interpreted by other economists as rational market reactions to the unsustainability of domestic macroeconomic policies or structural weaknesses. The objective of this paper is to evaluate the relative importance of macroeconomic unsustainability, financial vulnerability, and crisis contagion in a model that explains and predicts the Asian currency crises. Out-of-sample forecasts based on two-stage panel and logit regressions provide evidence of a pure contagion effect, which significantly worsened the crises. They also show that Indonesia was the only one of the six Asian nations examined (India, Indonesia, Malaysia, Philippines, South Korea, Thailand) that was in an unsustainable economic situation, and that the other five nations were only vulnerable to a currency crisis.     

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.     

基于信息的双重危机模型及其在东亚危机中的应用

由于近来在新兴市场国家发生的一系列货币危机都同时伴随着银行危机的发生,要全面地理解这些货币危机,我们需要将具有微观基础的银行部门明确地纳入到货币危机的分析模型中去.该文通过应用基于信息的银行挤兑模型,建立了一个双重危机模型,并对诸如经济基本面的脆弱如何导致双重危机,以及银行危机和货币危机如何相互作用等问题,做出了内生化的解释.模型抓住了最近新兴市场货币危机的本质特征,并与最近东亚危机的经验事实非常符合.     

Banking,currency, stock market and debt crises in Spain, 1850–1995

What type of crisis is generated when debt increases? We extend the literature by framework by introducing currency and stock market crises in the analysis. We apply our proposal to the case of Spain, since this is a country that has experienced a very important amount of financial crises from the nineteenth century onwards. We find the same results as the previous literature for the determinants of banking and debt crises but substituting external and public debt with perpetual debt and where perpetual debt has a less important role than crises in the private sector. Moreover, we find evidence in favour of the hypothesis that currency crises depend strongly and positively on financial centre crises and negatively and mildly on perpetual debt. We justify the negative relalionship due to an inflation tax. We also find evidence in favour of the hypothesis that stock market crises depend only positively and strongly on financial centre crises.     

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.     

Currency crises and the stock market: empirical evidence for another type of twin crisis

We explore the dependency between currency crises and the stock market in emerging economies. Our focus is two-fold. First, the risk of a currency crisis rises as the foreign stake in the domestic stock market increases. Successful economies with high capital flows into their booming stock markets especially are prone to stock market-induced currency crises. Second, we apply the dividend growth model to show that stock markets crash in the run-up to a currency crisis. This new type of twin crisis is empirically tested by employing a logit framework using quarterly data for 33 emerging economies for 1994Q1–2007Q4.     

Do hard pegs avoid currency crises? An evaluation using matching estimators

Using the bias-corrected matching estimators of Abadie and Imbens (2006) as a control for the self-selection problem of regime adoption, we estimate the average treatment effect of hard pegs on the occurrence of currency crises. We find the evidence that hard pegs significantly decrease the likelihood of currency crises compared with other regimes.     

Sudden stops and the Mexican wave: Currency crises,capital flow reversals and output loss in emerging markets

Sudden stops are the simultaneous occurrence of a currency/balance of payments crisis with a reversal in capital flows. We investigate whether sudden-stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output collapse (a “Mexican wave”). Using a panel data set over 1975–1997 and covering 24 emerging-market economies, we distinguish between the output effects of currency crises, capital inflow reversals, and sudden-stop crises. Sudden-stop crises have a large negative, but short-lived, impact on output growth over and above that found with currency crises. A currency crisis typically reduces output by about 2–3%, while a sudden stop reduces output by an additional 6–8% in the year of the crisis. The cumulative output loss of a sudden stop is even larger, around 13–15% over a 3-year period. Our model estimates correspond closely to the output dynamics of the ‘Mexican wave’ (such as seen in Mexico in 1995, Turkey in 1994 and elsewhere), and out-of-sample predictions of the model explain well the sudden (and seemingly unexpected) collapse in output associated with the 1997–1998 Asian Crisis.     

Evaluating currency crises: the case of the European monetary system

In this paper we examine the nature of currency crises. We ascertain whether the currency crises of the European Monetary System (EMS) were based either on fundamentals, or on self-fulfilling market expectations driven by extrinsic uncertainty. In particular, we extend previous work of Jeanne and Masson (J Int Econ 50:327–350, 2000) regarding the evaluation of currency crisis. We contribute to the existing literature proposing the use of Markov regime-switching with time-varying transition probability model. Our empirical results suggest that the currency crises of the EMS were not due only to market expectations driven by external uncertainty, or ‘sunspots’, but also to fundamental variables that help to explain the behavior of market expectations. We would like to thank Joseph Byrne, James Mitchell, Martin Weale and two anonymous referees for very useful comments and suggestions.