The Korean stock market volatility during the currency crisis and the credit crisis

This paper studies the volatility of the Korean stock market during the Asian currency crisis of 1997–1998 and the global credit crisis of 2008–2009. We use a fad model with Markov switching heteroskedasticity, which was first proposed by Kim and Kim (1996). Using the monthly data from January 1980 to October 2009, we find that the volatility of the transitory component of the stock return, or fads, increased during the currency crisis, but did not rise much during the credit crisis. It implies that the stock price fluctuations were not driven by irrational sentiments during the recent global crisis as much as during the former crisis. However, when we consider the dollar value of the Korean stock index in order to estimate the volatility that foreign investors confront, we find that the volatility of the transitory component was raised during the credit crisis as well as during the currency crisis. That is, foreign investors experienced greater volatility than domestic investors in the recent financial market turmoil. This asymmetric volatility that domestic and foreign investors face is one of the characteristics of the credit crisis.For more detailed analysis, the same model was applied to the weekly data from January 2005 to October 2009 and provided the result that the data measured by won–dollar exchange rates were more increased than the raw data. It holds that foreign investors confronted much greater volatility than domestic investors while the stock volatility was relatively lower in the credit crisis state than in the currency crisis state.     

Can a rapidly growing export-oriented economy exit smoothly from a currency peg? Lessons from Japan’s high-growth era

We analyze the impact of Japan’s exit from its currency peg in 1971. We identify sizeable effects on Japanese exports and investment but find that the negative impacts on the economy were neutralized by strong global demand and domestic fiscal support. While our analysis suggests that a rapidly-growing, export-oriented economy can exit a peg for a managed float despite the presence of capital controls and the absence of sophisticated foreign currency forward markets, it underscores the importance of exiting while global conditions are favorable and points to the importance of using fiscal policy to support domestic demand as the rise in the real exchange rate slows the growth of net exports and investment.     

Retrospect of the Chinese Exchange Rate Regime after Reform： Stylized Facts during the Period from 2005 to 2010

In the present paper, we estimate the de facto RMB exchange rate regime, the currency basket, the floating band and the foreign exchange market pressure before and after the reform of the Chinese exchange rate regime in 2005. We find the following stylized facts： the value of the RAIB became stable after the reform; the weight of the US dollar remained high in the basket, while other currencies remained statistically significant; and the floating band gradually increased to lO percent during 2005-2008, and then greatly narrowed from the late summer of 2008 under the assumption of a yearly resetting interval. We find that the foreign exchange market pressure increased from 2005 to 2008. A possible reason is that the weight of the US dollar in the basket was slightly lower than the share of the US dollar in total transactions on the Chinese foreign exchange market. Therefore, it is reasonable for China to adopt a dollar peg exchange rate regime.     

Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008

The paper estimates the impact of exchange rate movements on foreign direct investment (FDI). By using the panel data of Japanese FDI flows to nine dynamic Asian economies during 1987–2008, the paper finds that (i) FDI declined with a depreciation of the yen against host country currencies; (ii) it increased with exchange rate volatility; and (iii) it was little affected by the Asian financial crisis, especially when disguised financial flows were removed from the data. A novel result concerns the negative response of FDI to the third moment of monthly exchange rate changes: the volume of FDI was smaller when the distribution was positively skewed (i.e., when the yen was biased towards relatively large depreciation shocks). If skewness proxies for expected mean-reverting changes, this supports the idea that source country investors care about the future stream of revenues and returns denominated in their own currency. These results are robust, with other standard control variables having statistically significant coefficients with expected signs.     

Was it really a dollar peg?: The exchange rate policies of East Asian countries, 1980–1997

This paper examines the exchange rate policies of East Asian countries during the period preceding the currency crisis of 1997, in an attempt to ascertain the extent to which they could be considered, as they frequently are, as a dollar peg. We do so by estimating the implicit weights of foreign currencies in the nominal exchange rate determination of East Asian currencies by means of a time-varying parameter model. The crucial element of our approach concerns how the weight of the Japanese yen was altered in response to the movement of the yen–dollar exchange rate. It is found that, while the weight of the U.S. dollar was large and the weight of the Japanese yen was small for the period as a whole, the weight of the yen was raised in some of the countries in the early 1990s. In particular, the Korean and Malaysian authorities raised the weight of the yen when the yen depreciated against the U.S. dollar, while the Singaporean authorities raised the weight of the yen when the yen appreciated against the dollar.     

Price Stability and the Case for Flexible Exchange Rates

We revisit Friedman’s case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets.     

The evolving renminbi regime and implications for Asian currency stability

The Chinese authorities described the management of the renminbi after its 2005 unpegging from the US dollar as involving a basket of trading partner currencies. Outside analysts have detected few signs of such management. We find that, in the 2 years from mid-2006 to mid-2008, the renminbi strengthened gradually against trading partners’ currencies within a narrow band. In mid-2008, the financial crisis interrupted this experiment and the bilateral renminbi/dollar exchange rate stabilised at 6.8. The 2006-2008 experience suggests that a shared policy of gradual nominal effective appreciation renders East Asian currencies quite stable against one another. Such a shared policy would create favourable conditions for regional monetary cooperation.     

人民币国际化对货币政策有效性的影响

人民币国际化是否影响货币政策有效性?是人民币国际化程度提高之后货币大规模跨境流动而引起的担忧。文章研究发现,在给定其他因素不变的情况下,人民币国际化程度的提高放大了境外汇率变动对国内经济产出和价格的影响。因此,人民币国际化背景下,中央银行应将境外汇率失衡纳入货币政策的反应函数,反应系数取决于境外利率、产出和价格对境外货币需求的决定系数。理论分析还表明,人民币国际化程度不影响货币政策对国内价格的有效性,而是否影响货币政策对国内经济产出的有效性,则取决于经济结构特征。实证结果表明,目前人民币国际化未对国内利率、产出和价格带来明显冲击,且无论是在M0层次,还是在M2层次,人民币国际化均未明显影响国内货币政策有效性。     

Exchange Rate Stability and Financial Stability

Historical evidence reveals no monocausal explanation for banking crises, including one which would emphasize the maintenance of a currency peg. To some extent this follows from the standard textbook wisdom: whether fixed or flexible exchange rates are preferable depends on the source of disturbances. If threats to the stability of the banking system come from the “outside,” there is a case for exchange rate flexibility to discourage the banks from relying excessively on external sources of finance and to enhance the capacity of the domestic authorities to act as lenders of last resort. Conversely, if the main threats to the stability of the banking system emanate from “inside” (e.g., erratic monetary policies at home), there is an argument for attempting to peg the exchange rate in order to discipline domestic policymakers and vent shocks via the external sector. From this point of view, it is no surprise that there is no simple correlation between the exchange rate regime and the prevalence of banking crises.     

Monetary policy transmission and macroeconomic policy coordination in Pacific island countries

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass‐through and credit growth. Weak credit demand and under‐developed financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks' efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.     

The expectations management approach to stabilization in Argentina during 1976–1982

The main goals of the economic authorities in Argentina during 1976–1982 were to open the economy to foreign trade and to reduce inflation. The stabilization plan relied first on the control of money and wages, later on a preannounced schedule of a declining future exchange rate—actions that were supposed to be accompanied by a fiscal policy to reduce the public sector deficit.The stabilization plan was abandoned in the first quarter of 1981 for two reasons: an important financial crisis during the second quarter of 1980, and a deterioration of fiscal discipline that could no longer assure coherence between the deficit and the preannouncement schedule. The paper also argues that the political situation in Argentina undermined the credibility of the reforms and particularly the stabilization attempts. With the abandonment of the stabilization schedule, new commercial and exchange rate measures were gradually introduced, reversing the policy of opening the economy to foreign trade. The financial reform was reversed in 1982 with the virtual nationalization of deposits.The experience of Argentina suggests that capital inflows responding to interest rate arbitrage play a fundamental role in the short run dynamics of real exchange rates. They can promote the adjustment, or they can precipitate a run on the foreign exchange market. The lesson is that a stabilization plan based on the preannouncement of future exchange rates is highly risky for an economy like Argentina's.     

基于库里模型的越南危机分析与启示

2008年爆发的越南危机引起了世界的关注。本文在对越南危机现状描述的基础上,基于库里资产组合模型对危机的原因进行了深度剖析,得出结论:如果伴随着长期扩张政策带来的是流动性过剩和对国内企业的盲目注资而没有实际生产力的提升,一国经常项目的逆差可能引起本国汇率贬值和长期资本外流;若一国的金融体系不健全,不宜轻易开放资本项目。据此给中国的启示是,在预期存在的情况下,应采取减税、放松价格管制和降息的措施,同时尽量维持人民币汇率不再升值,鼓励金融创新与股权买卖,抓紧时间完善国内金融传导机制,实现经济的稳定和可持续发展。     

Europe’s hard fix: the Euro area

One of the most important economic policy issues is the selection of exchange rate regime. The possible choices range from the hard peg to a freely floating nominal exchange rate. Since the early 1990s a move towards the two corners of the exchange rate regime spectrum has been observed, especially in Europe with the creation of EMU. The move towards the corners is discussed from the perspective of Mundell’s “impossible trinity” which states that among the three desirable objectives (1) stabilisation of the exchange rate, (2) free international capital mobility, and (3) an effective monetary policy oriented towards domestic goals, only two can be mutually consistent. Issues related to economic integration and EMU are reviewed, focusing on the famous question: Does one size fit all? Since monetary union raises some interesting issues of political nature, not present in other exchange rate arrangements, the paper ends with a discussion about some political aspects of monetary union.     

Hong Kong's exchange rate regime:: Lessons from Singapore

Singapore's managed floating exchange rate regime contrasts with Hong Kong's currency board system featured by the Hong Kong–United States dollars peg. This paper appraises the two different exchange rate regimes by comparing their track records in maintaining macroeconomic stability and trade competitiveness in the 1990s. A review of the two regimes' institutional characteristics and macroeconomic performance reveals the systemic inadequacy of Hong Kong's exchange rate regime under a changing global financial environment. As East Asia emerges from the recent financial crisis, Singapore's experience of successfully moving away from a currency board system to a credible managed floating regime offers a lesson worthy of attention from Hong Kong.     

The French commitment to European monetary integration: A review of the two EMS crises (1981–83, 1992–93)

This paper focuses on the process of exchange rate management during the two European Monetary System(EMS) crises, in 1981–83 and 1992–93, and examines the factors which led the French governments to adhere to the EMS. France's strong franc (franc fort) policy is a useful test case for maintaining national commitment to European monetary integration. The origin of the franc fort policy can be traced back to the exchange rate crisis of 1981–83. By actively supporting European institutions and emphasizing the emergence of a strong and united European common currency, France discovered the way to bolster confidence in her economic policy. Beyond this focal point, political justification and economic rationality became mutually reinforcing, configuring French national preference in European monetary integration. The response of the French government to the EMS crisis of 1992–93 was more consistent compared to the response to the 1981–83 crisis, and reflected the accumulation of loyalty to European monetary integration. This loyalty, however, was made neither from purely economic calculation nor out of normative commitment French European monetary policy reflected the interaction between domestic politics and European monetary integration. The French commitment to the franc fort also was based on domestic political bases such as the existence of a core policy group, a centralized policy‐making structure, and an issue linkage between the franc fort and European integration.     

Trade Protection in Five EU Member Candidate Countries by Exchange Rate Adjustment,Customs Tariffs,and Nontariff Measures

Five central European candidate member countries for EU accession (Czech Republic, Hungary, Poland, Slovakia, Slovenia = CE-5) entered into the transition period with undervalued exchange rates to stimulate exports and protect domestic industries. However, this policy was not maintained. During 1993–1995, real currency appreciation increased competitive pressure by foreign firms. To protect domestic firms, governments applied high third-country tariffs, temporary import taxes, and numerous administrative barriers to trade. As countervailing pressure by the EU and the U.S. increased and current account deficits soared in 1996 and 1997, the five countries more and more brought exchange rate policies in line with the changes in purchasing power parity.There seems to be a positive correlation between large current account deficits and the more intense use of nontariff protectionist measures. Using exchange rate measures, Slovenia keeps the current account rather balanced. It employs many less nontariff protectionist measures than the other four countries, which show strong tendencies towards real exchange rate appreciation.     

Zwevende wisselkoersen

Summary It is shown that the most important advantages of fluctuating exchange rates (full employment; protection against the import of inflation; optimal international specialisation) as well as the disadvantages of this system (instability of the economy; inflationary pressure; hampering international economic relations) only have a limited validity. On the other hand the advantages of fixed exchange rates (promoting international trade; impeding internal inflation) and its disadvantages (larger unemployment; import of inflation) have no more general validity. A crawling peg does not give a solution for fundamental disequilibria and a widening of the band implies a more difficult task for the authorities. Fluctuating exchange rates always leave open the possibility of ‘dirty floating’. An adjustable peg with rules for swift adjustment for deficitand surplus countries might well give the best solution.     

波兰和泰国汇率制度改革经验与启示

经济环境的变化决定着汇率制度的变迁。波兰转轨以来汇率制度相继选择了单一盯住美元、盯住一篮子货币、爬行区间浮动和自由浮动等形式。泰国二战至亚洲金融危机爆发前一直采用单一盯住美元的固定汇率制度。文章据此结合我国人民币汇率制度得出如下经验与启示：应牢牢把握汇率制度调整的主动权并渐进改革,协调好汇率制度与货币政策的关系,与汇率制度相配合有步骤地开放资本项目,加强金融监管尤其是加强对货币错配的审慎性监管等。