Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers

The ongoing financial crisis has drawn considerable attention to the role of credit rating agencies in the financial system. We examine how the foreign exchange market reacts to sovereign credit events prior to (2000–2006) and during the crisis (2006–2010). The sample includes a broad set of countries in Europe and Central Asia in order to investigate spillover effects. We find that rating agencies’ signals do affect the own-country exchange rate and we identify strong spillover effects to other countries’ exchange rates in the region. In both cases, the impact of outlook and watch signals is stronger than the impact of actual rating changes. Market reactions and spillovers are far stronger during the financial crisis period than pre-crisis. Negative news from all three major agencies has an impact, whereas only Moody's positive news produces a reaction. Negative news from Fitch tends to have the strongest effect. The findings are important in enhancing understanding of the role of rating agencies and the market response to their signals.     

Trade patterns and institutional change in East Asia

We investigate how trade patterns – institutionally intensive exports (IIX) – affect institutional quality in East Asia compared to the rest of the world, and whether the effect changed due to the Asian financial crisis. To examine this, we use panel data of 117 countries for the period 1988–2007. Our fixed effect model estimation reveals that the effect of IIX on institutional quality is negative and significant for East Asia, while the effect is insignificant for the rest of the world. The negative effect in East Asia is more pronounced for the five East Asian countries that were strongly affected by the crisis – South Korea, Indonesia, Malaysia, the Philippines and Thailand – than for other East Asian countries. Furthermore, our results reveal that the negative effect for East Asia does not change significantly after the crisis, both in the short and long term, and that improvement in institutional quality after the crisis is not different from that of the rest of the world. This suggests that the crisis had no significant impact on East Asia's institutional quality or on the effects of IIX on institutional quality.     

The prospects of a monetary union in East Asia

This paper assesses the empirical desirability of the East Asian economies to form a monetary union. The Structural Vector Autoregression (VAR) method is employed to assess the nature of macroeconomic disturbances among the East Asian countries, as a preliminary guide in identifying potential candidates for forming an Optimum Currency Area (OCA). In comparison with European countries, East Asia has less symmetric underlying structural shocks but the speed of adjustment to shocks is much faster. The empirical results suggest that there exists a scope among some small sub-regions, comprising mainly of ASEAN countries, for potential monetary integration. The finding of an increased symmetry of shocks among countries after the Asian Financial crisis indicates that the regional policy-coordinating effort after the crisis has put the region on the right track if monetary union is a desired goal.     

THE CHOICE OF EXCHANGE RATE REGIME AND THE VOLATILITY OF EXCHANGE RATES BEFORE AND AFTER THE ASIAN CRISIS: A COUNTERFACTUAL ANALYSIS*

This paper carries out a counterfactual analysis of the impact of alternative exchange rate regimes on the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US dollar for nine East Asian countries, both before and after the Asian financial crisis. Our hypothetical regimes include a unilateral basket peg (UBP), a common basket peg (CBP) and a hard peg against the $US, but in contrast to previous counterfactual exercises which compute the weights for effective exchange rates on the basis of simple bloc aggregates, we apply a more disaggregated methodology using a larger number of trade partners and utilise ARCH/GARCH techniques to better capture the time‐varying characteristics of volatility. Our results suggest that a UBP would minimise effective exchange rate volatility for all countries both before and after the crisis and provides the highest regime gains compared to actual. Although the gains for a CBP are always less than those for a UBP the absolute differences between the two regimes appear to be small. In terms of bilateral exchange rates against the dollar the gains from a UBP or CBP could also be quite significant for the non‐dollar peggers, especially post‐crisis, since a fall in effective instability would be accompanied by a fall in bilateral instability.     

The 1997 Asian Currency Crisis,Financial Linkages,and the Monetary Policy of Japan

The evidence is examined that excessively liberal monetary policy by the Bank of Japan, before and after the financial collapse of Japan in 1992, may have led other East Asian economies into “over‐borrowing” and speculative investments, prior to the currency crisis in 1997–98. The authors test for cointegration and Granger causality between Japanese money supply M1 and the domestic investment of eight East Asian economies and Australia. US and German money supplies are also used as a benchmark. There is strong evidence that there are long‐ and short‐run causal relationships between the Japanese money supply and the domestic investment of the Asian crisis‐inflicted economies prior to 1997.     

Regional Integration in East Asia: Achievements and Future Prospects

Economic integration in East Asia has been largely market driven. Attempts in the late 1980s to establish an East Asian regional economic grouping failed to materialize for a number of reasons. The financial crisis in 1997–1998 has strengthened the realization of regional countries that they need to have some self‐help mechanisms to overcome that crisis and to prevent future crises. This led to the development of several functional integration programs, including the network of bilateral swap arrangements known as the Chiang Mai Initiative. However, progress remains slow. The question that has arisen is how far these efforts need to be supported by institutional integration. Should the ASEAN Plus Three, the main regional cooperation process in East Asia involving the 10 South‐East Asian countries plus China, Japan, and South Korea, be deepened institutionally? Meanwhile, the region has seen the establishment of a new process, the East Asia Summit, involving the above 13 countries plus Australia, India, and New Zealand. How will these different arrangements contribute to East Asia's economic dynamism and prosperity as well as peace and political stability?     

Forecasting Turkey’s Credit Ratings with Multivariate Grey Model and Grey Relational Analysis

The concept of credit rating rooted back to mid-nineteenth century has become one of the most important elements in the world economy together with the globalization period gradually accelerating in the last two decades and increasing the interaction and sensitivity in the international markets. With the globalization and deepening in the financial markets; the effect, reliability and stability of knowledge of the actors who are in charge for directing the global capital flows have quite a big importance in terms of the decisions to be made in the future. In this process, credit rating agencies eliminating the information asymmetry between the countries and institutions who want to create financial resource by borrowing from the savings owners and foreign institutions. Credit ratings determined by the mentioned organizations are accepted as an indicator of the countries to meet the financial obligations in other words their creditworthiness. For Turkey’s economy having a structure with a high level of external financing needs in terms of accelerating the growth and development process, it is inevitable to have an international creditworthiness increasing long-term investment tendency meeting foreign capitals’ trust search. In this study, firstly the determinants of the credit ratings given by credit rating agencies are determined and then forecasting Turkey’s future credit ratings by combining them with multivariate grey model and grey relational analysis are performed.

     

外商直接投资与东亚金融危机——一个新的分析视角

关于东亚金融危机爆发原因的研究很多。但是大多数研究没有注意到FDI的大量流入对于东亚国家爆发金融危机的影响。虽然FDI没有直接引起金融危机的爆发,但是它确实对危机国家经济脆弱性的形成发挥了作用。FDI给东道国带来的金融风险往往是潜在的,如果不能有效监管,这种潜在金融风险就有转化成现实金融风险的可能。所以,一味提高FDI的引资比重并不能使发展中国家摆脱金融危机的侵扰,发展中国家有必要加强对FDI的监管。     

PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

This paper asks whether rating agencies played a passive role or were an active driving force during Europe??s sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equations to decompose actual ratings into systematic and arbitrary components that are not explained by previously observed procedures of rating agencies. Finally, we check whether systematic, as well as arbitrary, parts of credit ratings affect credit spreads. We find that both do affect credit spreads, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecies that may drive even relatively healthy countries towards default.     

The East Asian Dollar Standard, Fear of Floating, and Original Sin

Before the crisis of 1997/98, the East Asian economies—except for Japan but including China—pegged their currencies to the US dollar. To avoid further turmoil, the IMF argues that these currencies should float more freely. However, the authors’ econometric estimations show that the dollar's predominant weight in East Asian currency baskets has returned to its pre‐crisis levels. By 2002, the day‐to‐day volatility of each country's exchange rate against the dollar had again become negligible. Most governments were rapidly accumulating a “war chest” of official dollar reserves, which portends that this exchange rate stabilization will come to extend over months or quarters. From the doctrine of “original sin” applied to emerging‐market economies, the authors argue that this fear of floating is entirely rational from the perspective of each individual country. And their joint pegging to the dollar benefits the East Asian dollar bloc as a whole, although Japan remains an important outlier.     

The endogeneity of the Optimum Currency Area criteria in East Asia

The Asian financial crisis in mid-1997 has increased interest in policies to achieve greater regional exchange rate stability in East Asia. It has renewed calls for greater monetary and exchange rate cooperation. A country's suitability to join a monetary union depends, inter alia, on the trade intensity and the business cycle synchronization with other potential members of the monetary union. However, these two Optimum Currency Area criteria are endogenous. Theoretically, the effect of increased trade integration (after the elimination of exchange fluctuations among the countries in the region) on the business cycle synchronization is ambiguous. Reduction in trade barriers can potentially increase industrial specialization by country and therefore resulting in more asymmetry business cycles from industry-specific shocks. On the other hand, increased trade integration may result in more highly correlated business cycles due to common demand shocks or intra-industry trade. If the second hypothesis is empirically verified, policy makers have little to worry about the region being unsynchronized in their business cycles as the business cycles will become more synchronized after the monetary union is formed. This paper assesses the dynamic relationships between trade, finance, specialization and business cycle synchronization for East Asian economies using a Generalized Method of Moments (GMM) approach. The dynamic panel approach improves on previous efforts to examine the business cycle correlations — trade link using panel procedures, which control for the potential endogeneity of all explanatory variables. Based on the findings on how trade, finance and sectoral specialization have effects on the size of common shocks among countries, potential policies that can help East Asian countries move closer toward a regional currency arrangement can be suggested. The empirical results of this study suggest that there exists scope for East Asia to form a monetary union.     

Dynamic correlation and equicorrelation analysis of global financial turmoil: evidence from emerging East Asian stock markets

This study investigates the dynamic conditional correlations (DCCs) between eight emerging East Asian stock markets and the US stock market and analyses the dynamic equicorrelation among these nine stock markets. We find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis. We refer to this finding as contagion from the US stock market to the emerging East Asian markets. We also find an additional significant process of increasing correlations and equicorrelation (herding) in the second phase of the global financial crisis. Further, we employ two new models, namely DCCX-MGARCH (a DCC Multivariate GARCH model with exogenous variables) and DECOX-MGARCH (a dynamic equicorrelation multivariate GARCH model with exogenous variables), to identify the channels of contagion. We find that an increase in the VIX Index increases the conditional correlations and equicorrelation, while increases in TED spreads decrease the conditional correlations of six emerging East Asian countries with the USA. We compare the accuracy of the conditional correlation estimates of the DCC and DCCX models (or DECO and DECOX models) by constructing a loss function. We find that the DCCX (DECOX) model provides more accurate conditional correlation estimates than the DCC (DECO) model by extracting additional information from exogenous variables.     

An analysis of East Asian currency area: Bayesian dynamic factor model approach

There has recently been an increasing interest in the establishment of a common currency area in East Asia in the aftermath of the East Asian financial crisis. In this article I examine the desirability and feasibility of forming a currency area in the region by checking the symmetry of shocks as an important criterion of the theory of Optimum Currency Area. I employ a dynamic factor model to decompose aggregate output into world, regional and country‐specific components and estimate the model using a Gibbs sampling simulation. Persistent properties of those components are examined and variance decomposition analysis is performed to investigate the role of each component in output variance. The European Monetary Union, with the successful launch of the euro, is the natural benchmark for comparison. Based on variance analysis, it is found that East Asian countries, on average, are less plausible candidates for a currency area than European counterparts. However, a subgroup of countries in East Asia is as qualified as those in Europe. Given the ongoing integration in East Asia, it is not premature to prepare for such a currency area in this region.     

东亚美元本位、浮动恐惧和原罪

概要亚洲金融危机以前 ,包括中国在内的东亚国家———除了日本———都把本国的货币与美元挂钩。为了避免进一步的混乱 ,国际货币基金组织曾建议这些国家的汇率应该进一步自由浮动。可是 ,我们的分析表明 ,到目前为止 ,美元在东亚国家的货币篮子里依然占据绝对比重 ,也就是说 ,东亚国家的汇率制度基本上又回到了危机以前。到 2 0 0 2年 ,每一个东亚国家货币对美元的每日波幅已经非常微小 ,以至于可以忽略不计。同时 ,大多数东亚国家迅速积累了作为“战争基金”的官方外汇储备 ,这预示着汇率稳定将从每日延续到每月和每个季度。从“原罪”(…     

How Would an Appreciation of the Renminbi and Other East Asian Currencies Affect China's Exports?

China's global current account surplus equaled 9% of Chinese GDP in 2006 and 11% of GDP in 2007. Many argue that a renminbi appreciation would help to rebalance China's trade. Using a panel dataset including China's exports to 33 countries we find that a 10% renminbi (RMB) appreciation would reduce ordinary exports by 12% and processed exports by less than 4%. A 10% appreciation of all other East Asian currencies would reduce processed exports by 6%. A 10% appreciation throughout the region would reduce processed exports by 10%. Since ordinary exports tend to be simple, labor-intensive goods while processed exports are sophisticated, capital-intensive goods, a generalized appreciation in East Asia would generate more expenditure-switching towards US and European goods and contribute more to resolving global imbalances than an appreciation of the RMB or of other Asian currencies alone.     

FEAR OF FLOATING IN EAST ASIA?

Abstract.  We examine the de facto exchange rate arrangements in eight East Asian countries during the post-Asian crisis period. The empirical results suggest that three countries adopted a hard peg or a peg with capital account restrictions, whereas five countries moved toward a more flexible exchange rate arrangement in the post-crisis period. Three of these five countries (Korea, Indonesia and Thailand) achieved a level of exchange rate flexibility close to the level accomplished in a free floater such as Australia. These results suggest that 'fear of floating' in East Asia is not prevalent in the post-crisis period, supporting the bipolar view of the optimal exchange rate regime.     

Is East Asia an optimum currency area?

This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). We extend the existing literature by improving the methodology of assessing the symmetry shocks in evaluating the suitability of a common currency area in the East Asian economies employing the Bayesian State-Space Based approach. We consider a model of an economy in which the output is influenced by global, regional and country-specific shocks. The importance of a common regional shock would provide a case for a regional common currency. This model allows us to examine regional and country-specific cycles simultaneously with the world business cycle. The importance of the shocks decomposition is that studying a subset of countries can lead one to believe that observed co-movement is particular to that subset of countries when it in fact is common to a much larger group of countries. In addition, the understanding of the sources of international economic fluctuations is important for making policy decisions. The falling share of country specific factor and the rising role of region factor indicate that East Asia has become increasingly favorable for a monetary union. However, the share of country-specific factor that is still significant implies that it could be costly to renounce individual currencies to advance into a monetary union in East Asia.     

人民币成为区域主导货币的实证研究——基于汇率视角的考察

从历史和现实的视角看,如果说布雷顿森林体系的崩溃导致了欧洲货币体系的形成和欧元的诞生,那么美国金融危机引发的国际货币动荡正在使东亚各国脱离美元本位,寻找区域内稳定的货币锚,而人民币则有可能成为东亚区域内首选的货币锚。本文拟从多边汇率相互影响的视角出发,实证分析人民币汇率变动态势及其与东亚其他货币之间联动关系的变化(包括其它国际货币汇率的变动对东亚其它货币之间关系变化的比较),从而揭示人民币成为区域锚货币、成为区域主导货币的可能性及其途径、进而了解人民币经济区形成的条件和趋势。     

Stress test for reforms: Transition and East Asian 'contagion'

Contagion from East Asia imposed a severe 'stress test' on the market-orientedreforms of transition economies. We find that the portfolio reallocations of investors differentiated sharply among these economies at the height of the East Asian turmoil, appearing clearly in the relative movements in interest rates and share prices. Those countries that appeared more vulnerable to contagion had large public or private sector imbalances and low reserve cover of short-term debt. The analysis, however, goes beyond macroeconomic and financial imbalances to link these weak fundamentals to inadequate structural and institutional reforms. We find that flaws in public finances together with weak enterprises and financial institutions were key underlying factors in the vulnerability to East Asian contagion. They were also key causes of the Russian crisis, which initiated a new round of contagion driven primarily by high exposures to Russian trade.     

金融危机背景下我国信用评级机构声誉机制研究

金融危机爆发的原因是多方面的,但信用评级机构未能及时向投资者提示结构化金融产品的潜在风险是其原因之一。金融危机使得评级机构面临着声誉危机,这也显示出声誉机制没有发挥应有的激励约束作用。本文在金融危机背景下通过声誉溢价模型考察了信用评级机构声誉机制,并结合我国信用评级市场发展状况,分析了我国信用评级机构声誉机制缺失动因,提出了重塑我国信用评级机构声誉机制,提高评级质量的政策建议。