An empirical analysis of currency volatilities during the recent global financial crisis

This paper investigates the impact of the 2008–2009 global financial crisis on the co-movement of 16 currencies in the sample. It employs a two-step atheoretic empirical methodology; it i) applies change point estimation based on geometric Brownian motion to detect change points in volatilities and ii) applies Engle's (2002) dynamic conditional correlation (DCCR) approach to estimate time varying correlations and then, observes the behavior of volatility co-movements during the periods found in (i). The results show that volatilities increase at least twofold with the outbreak of the crisis and there is an inverse relationship between volatility and the duration of the crisis. The DCCRs usually increase with the onset of the crisis and they fluctuate smoothly afterwards while keeping that increased level.     

The 1994 currency crisis in Turkey

This paper analyzes the 1994 crisis in Turkey. The period preceding the crisis witnessed a continuous deterioration of macroeconomic fundamentals. However, domestic debt financing of public deficits prevented reserve losses and an increase in inflation rate. It is argued that despite weak fundamentals of the period preceding the crisis, in the absence of policy “mistakes” that played a role of a series of shocks in the second half of 1993, the financial crisis could have been avoided.     

Recovery from a currency crisis: some stylized facts

Using a comprehensive data set of over 100 developing countries, this paper examines how economies recover from a currency crisis. Some of the regularities found are listed below. First, it takes less than 3 years for the GDP growth rate to fully recover its tranquil-period average. The level of GDP, however, remains permanently below its initial trend, suggesting that the shocks underlying a crisis are persistent. Second, the credit crunch problem lasts much longer than the reduction in the GDP growth rate. Third, the pre-crisis credit expansion and reserve inadequacy, which have been widely recognized as the main causes of a crisis, also are closely related to the extent of the post-crisis recession. Fourth, crisis episodes that are caused mainly by illiquidity, rather than by insolvency, tend to exhibit a sharp recovery.     

The role of (non-)transparency in a currency crisis model

This paper extends the work by Morris and Shin (Am. Econom. Rev. 88 (1998) 587-597) where multiple equilibria in the self-fulfilling currency attack models can be reduced to a unique equilibrium when agents observe fundamentals privately with small errors. We find that under a more general specification with realistic parameters, noisy private observations are generally insufficient to prevent the multiplicity of equilibria. The pivotal role played by the transparency of fundamentals/policies in currency crisis is also examined. Surprisingly, transparency may trigger rather than eliminate currency crises when fundamentals are relatively healthy. Our results may be relevant to research in other coordination problems.     

Export growth slowdown and currency crisis: the Malaysian experience

A slowdown in export growth occurred in all East Asian economies that were affected by the Asian currency crisis. Misaligned exchange rates have been widely cited as a cause of the slowdown. In the Malaysian context at least a vulnerability to the downturn in the electronic cycle could also be a major factor leading to poor export performance. Using the US/yen dollar rate as a proxy for exchange rate misalignment and US total new orders for electronics as a proxy for global electronics demand, cointegration analysis was used to establish the likely causes of a slowdown in Malaysia's export performance. Empirical results suggest that a unique long-run relationship exists between all three variables. The policy implications of these results including exchange rate monitoring and export diversification are discussed in the conclusion.     

Determinants of sovereign bond yield spreads in the EMU: An optimal currency area perspective

In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. We find evidence for a level break in the cointegrating relationship. Moreover, results show that (i) fiscal imbalances – namely expected government debt-to-GDP differentials – are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.     

The Euro: An Italian perspective

The adoption of Euro as a common currency of twelve European countries has meant a considerable change in the Italian exchange rate policy. In the past, before Italy entered the EMS and again in 1992-96 when Italy temporarily left the EMS, the Italian monetary authorities enacted a policy of managed exchange rates, aiming at keeping the dollar rate stable, while letting the Italian lira depreciate vis-à-vis the German mark. By so doing, the danger of imported inflation was reduced (the dollar area was then a major import area) and at the same time the Italian exports to Europe were made easier. In the presence of a regime of fixed exchange rates in the European area, Italian industry is trying to make its exports more competitive by means of a reduction in costs. This means moving segments of production to small or middle-size firms, located in Italy as well as in developing countries. A further help is coming from the gradual but consistent depreciation of the Euro against the US dollar. The relevance of the dollar area in Italian exports has been correspondingly increasing.     

Investor sentiment and the financial crisis: a sentiment-based portfolio theory perspective

The article proposes a portfolio model subjected to a constraint that captures the investor’s goal, with maximum estimation of expected return that is affected by investor sentiment. And we give a solution of the portfolio model by exploring the geometric features. Furthermore, we discuss the relationship between investor sentiment and the financial crisis by analysing the optimal allocation. The results show that: when investor sentiment is low enough, the investor should reject the investment, this condition leads the depression financial market to prevail, then the financial crisis erupts; when investor sentiment is modest, the financial crisis is difficult to erupt unless the decline of investor sentiment is quick and deep; but there is a special status that the financial crisis is caused by other factors rather than by investor sentiment; and only improving investor sentiment cannot move away from the financial crisis.     

Single currency and fiscal performance: the early Euro Area in perspective

We examine how exchange rate regimes affect fiscal discipline by investigating European countries as they transitioned from flexible to fully fixed exchange rates under the Euro. We apply the synthetic control method to estimate, for each Eurozone country, its counterfactual budget stance under flexible rates. Our evidence strongly suggests that fixing exchange rates negatively impacted negatively fiscal discipline. However, effects were not homogeneous, as they were mediated by political factors. For example, countries where policymakers faced a longer political horizon and operated within a more cohesive political environment, managed to perform better in terms of fiscal discipline.     

The choice of an optimum exchange currency regime for a small economy: An econometric analysis

This paper investigates empirically the issue of a fixed versus a flexible exchange currency regime for a small economy: The West African Monetary Union. The econometric analysis implements a Mundellian trade-off between economic development and monetary stability which measures the main cost and benefit of the various exchange currency regimes examined. The empirical results indicate that the fixed trade-weighted basket peg is optimal by the Tower and Willet criterion and that it meets some of Kenen's criteria for an efficient exchange currency regime.     

The global financial crisis and protectionism: Substitution from tariffs to non-tariff measures

This study empirically investigates the relationships between tariffs and non-tariff measures before and after the global financial crisis (GFC). The panel analysis is based on traded products of 70 countries from 1997 to 2015. For developed countries, we find that tariffs and non-tariff measures were complementary before the crisis, but they became substitutional afterward. We do not find such shift for developing countries. We also run the analysis by income levels and by types of products and observe differential effects of the GFC on the relationship between the two trade policies.     

The design of monetary and fiscal policy: A global perspective

We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.     

World real interest rates: a global savings and investment perspective

Over the past 15 years, long-term interest rates have declined to levels not seen since the 1970s. This article explores possible shifts in global savings and investment that have led to this fall in the world real interest rate. There are several key findings. First, the authors identify the relative weakness in investment demand as more important than the relative increase in desired global savings to explain the decline in global interest rates. Second, the results indicate that the key factors explaining movements in savings and investment are variables that evolve relatively slowly over time, such as labour force growth and age structure. The conclusions suggest that over the coming years, world real interest rates are likely to continue to adjust slowly, reflecting long-term trends.     

The rebound effect: An evolutionary perspective

The rebound effect presents a major flaw in to energy conservation policies that aim to reduce energy consumption through energy efficiency development. Economics and energy related disciplines have thus far developed tools to measure such a phenomenon. This paper attempts to explain this seeming paradox using a thermodynamic-evolutionary theoretical framework in addition to the traditional economic approach. We here propose that evolutionary systems, such as biological or even economic systems, may rearrange themselves in a more complex fashion under the pressure of an increasing flux of energy, driven by the higher conversion rate of greater efficiency. Higher complexity, due to a greater energy density rate, counteracts the positive effects of energy efficiency. We investigated this hypothesis in the context of the road freight transport system and the productive structure. The qualitative analysis in this paper, further substantiated by figures, provides a link between the dynamics of production patterns and the effect of efficiency in the light of the macro-economic effects of increased energy demand. The analysis departs from a rigorous investigation of the actual energy efficiency evolution in the road freight transport system to develop through a survey of the subsequent worldwide economic revolution in the production system. It is then shown how outsourcing, the key feature of globalization, can be identified as the main source of traffic density growth. Finally, four paradigms are used to stress how the shift in the production system must be considered a leap in structural complexity that consequently serves to increase the frequency of components’ interactions.