Defending against speculative attacks – It is risky,but it can pay off

While currency crises are typically considered to be painful and costly events, a closer look reveals that economic developments after a speculative attack differ considerably. Monetary authorities can play a central role in determining the economic course and costs of currency crises. They have to decide whether to defend or not to defend the domestic currency giving rise to three different types of crises: (i) an immediate depreciation if the central bank does not intervene and either (ii) a successful defense or (iii) an unsuccessful defense in the case of an intervention. We find that a central bank has two options to mitigate the costs of speculative attacks, namely an immediate depreciation and a successful defense. If a central bank intervenes she might be able to stabilize the exchange rate only temporarily and risks to ultimately fail facing the worst of the three scenarios with the highest economic costs.     

Economic costs of alternative monetary policy responses to speculative currency attacks

The outcome of a speculative attack on the foreign exchange rate can be classified into three cases: (i) immediate depreciation of the nominal exchange rate, (ii) successful defense, or (iii) failed defense. This paper explores which of these outcomes yields the lowest cost in terms of output and unemployment in the short and medium run. Ex-ante the outcome of a speculative attack is uncertain, therefore the appropriate response of monetary authorities to a speculative attack depends on the cost of an immediate depreciation compared with that of the expected outcome of a currency defense. Our empirical analysis focuses on a sample of 73 emerging and developing countries over the 1960–2011 period. Our results indicate that an immediate depreciation is the policy response that is associated with a lower expected output loss and unemployment in the short run and it tends to be expansionary in the medium run. A defense, if successful, entails insignificant costs in the short run but, unlike an immediate depreciation, a successful defense is not expansionary in the medium run. If a defense fails, large output losses and an increase in unemployment ensue, at least in the short run.     

Bank recapitalization and economic recovery after financial crises

Does support to distressed banks early on during financial crises mitigate the macroeconomic consequences of financial distress, and if so does it matter what form the intervention takes? We analyze the effects of government and central bank interventions in 69 systemic banking crises since 1980, of which 29 are part of the recent global financial crisis. Our estimation approach controls for the correlation between intervention measures and the time-invariant component of unobservable crisis severity. We find that timely bank recapitalizations substantially reduce the duration of recessions, underscoring the distortions caused by zombie banks and the costs of regulatory forbearance.     

银行危机救助策略的分析

银行危机的救助策略一直是理论界关注的焦点。本文通过构建一个两期模型,以银行危机是否会引发货币危机为评判标准,探讨政府在面对商业银行清偿能力危机时救助与不救助的抉择。经研究发现:当商业银行的不良资产率高,或商业银行在经济中起重要作用,抑或产出的价格弹性较小时,为了避免货币危机的发生,政府应该出手对商业银行提供救助。在相反的情况时,固定汇率制度下,政府为了维护其固定汇率的信誉应该出手对商业银行提供救助;浮动或管理浮动汇率制度下,考虑到商业银行的道德风险问题,政府应该不予以救助。     

Do jumps mislead the FX market?

This paper investigates the link between jumps in the exchange rate process and rumours of central bank interventions. Using the case of Japan, we analyse specifically whether jumps trigger false reports of intervention (i.e. an intervention is reported when it did not occur). Intraday jumps are extracted using a non-parametric technique recently proposed by Lee and Mykland in 2008 and by Andersen et al. in 2007, and later modified by Boudt et al. in 2011. Rumours are identified by using a unique database of Reuters and Dow Jones newswires. Our results suggest that a significant number of jumps on the YEN/USD have been falsely interpreted by the market as being the result of a central bank intervention. The paper has policy implications in terms of central bank interventions. We show that in times where the central bank is known to intervene, some investors may attach a lot of weight to central bank interventions as a source of exchange rate movement, leading to a false ‘intervention explanation’ for observed jumps.     

Anatomy of banking crises in developing and emerging market countries

This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT model identifies three conditions (and the specific threshold of the key indictors) at which the vulnerability to banking crisis increases—(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low bank liquidity, and (iii) low bank profitability—which highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are important drivers of banking crises. The results also emphasize the importance of conditional thresholds in triggering crises, in that banking crises are underlined by a combination of vulnerabilities—or a sequence of (non-linear) conditions—rather than the deterioration of a unique factor.     

Foreign exchange intervention and equilibrium real exchange rates

Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects – when they are significant – would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.     

Some Parallels Between Currency and Banking Crises

There is a sizeable literature on the causes of speculative attacks on fixed exchange rates and a large literature on the determinants of bank runs. Surprisingly, these two literatures rarely overlap, even though both types of crises involve attacks on asset price-fixing schemes. This paper draws a number of parallels between the work on currency crises and the work on banking crises and examines some of the new insights that are coming out of a more integrated approach in the aftermath of the Asian financial crises.     

FX Intervention in the New Keynesian Model

We develop an open-economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator and shocks to risk appetite in international capital markets. We obtain closed-form solutions for optimal monetary and FX intervention policies assuming the central bank cannot commit to future policies, and we compare the solution to that under policy commitment. We show how FX intervention can help reduce the volatility of the exchange rate, of inflation, and of the output gap, thus mitigating welfare losses associated with shocks in the international capital markets. We also show that, when the financial accelerator is strong, there is a risk of indeterminacy (self-fulfilling currency and inflation movements) although FX intervention can reduce this risk and thus reinforce the credibility of the inflation targeting regime. Model simulations match well the impact of a VIX shock obtained by local projections on a panel of inflation targeting emerging markets.     

Why do central banks intervene?

Intervention by central banks, in terms of buying and selling foreign currency, has been a major activity in recent years. This paper investigates the motivations for such policy and the evidence for its effectiveness. We use high quality daily data on the dollar amounts of intervention by the central banks of the US and Germany. We also use information on agreed G7 target levels for the $/DM and $/Yen nominal exchange rates. Daily, nominal dollar exchange rate returns are well described as a Martingale-GARCH process, and we find little evidence that the different types of intervention have had much effect on the conditional mean of exchange rate returns. There is some evidence that intervention is associated with slight increases in the volatility of exchange rate returns. While little evidence is found for the effectiveness of intervention, the motivations are more clear. In particular, from the application of probit analysis we find that the probability of intervention is determined by the magnitude of the deviation of the nominal exchange rate from the agreed target level and, to a lesser extent, by the current volatility of exchange rates.     

International Spillover Effects and Monetary Policy Activism

This paper examines how the preferences of a large economy’s central bank affect the trade‐off between output and inflation volatility faced by the central bank of a small open economy by analyzing the impact of a global cost‐push shock. We demonstrate that under the assumption of producer currency pricing, the trade‐off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilization relative to inflation stabilization; but the opposite is true in the case of local currency pricing.     

The impact of central bank digital currency variation on firm's implied volatility

The paper investigates whether a firm's implied volatility is affected by the volatility of central bank digital currencies. Our sample covers 2853 listed companies in the United States from 2014 to 2018. First, we find the variation of central bank digital currency has a positive impact on a firm’s implied volatility. Second, the healthier firms’ conditions can reduce the relationship between central bank digital currency variation and a firm’s implied volatility. Third, the positive relation between central bank digital currency and firm’s implied volatility still exists in investment-grade, speculative-grade, and unrated firms. Finally, to eliminate the endogeneity problem, we adopt simultaneous equation models (SEM) and find our results are still robust after excluding endogenous concerns. Our research provides a reminder for corporate managers and new implications for policymakers.     

The size of banking crises in credible fixed exchange rate regimes

Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and Argentina, still suffered crises in their domestic banking sectors. The present note illustrates that bank incentives to take on excess risk still exist in countries with currency peg credibility and that the size of that risk exposure (and thus the potential for crisis) may be positively related to the level of central bank foreign exchange reserves.     

How costly are debt crises?

The aim of this paper is to assess the short and medium-term impact of debt crises on GDP. Using an unbalanced panel of 154 countries from 1970 to 2008, the paper shows that debt crises produce significant and long-lasting output losses, reducing output by about 10 percent after 8 years. The results also suggest that debt crises tend to be more detrimental than banking and currency crises. The significance of the results is robust to different specifications, identification and endogeneity checks, and datasets.     

Bank regulation,property prices and early warning systems for banking crises in OECD countries

Early warning systems (EWS) for banking crises generally omit bank capital, bank liquidity and property prices. Most work on EWS has been for global samples dominated by emerging market crises where time series data on bank capital adequacy and property prices are typically absent. We estimate logit crisis models for OECD countries, finding strong effects from capital adequacy and liquidity ratios as well as property prices, and can exclude traditional variables. Higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities, implying long-run benefits to offset some of the costs that such regulations may impose.     

Central bank digital currency and the effectiveness of negative interest rate policy: A DSGE analysis

Implementing a negative interest rate policy (NIRP) in the traditional fiat system is less effective than desired because of the zero lower bound (ZLB) constraint on interest rates and the cash barrier. Would this problem be solved if a new form of currency was introduced, i.e., central bank digital currency (CBDC), in the economy? To answer this question, we construct a dynamic stochastic general equilibrium (DSGE) model to analyze the effectiveness of NIRP upon the introduction of CBDC. The results suggest that: (i) The CBDC can eliminate the ZLB constraint and stabilize the economic fluctuations caused by NIRP. (ii) The central bank can implement NIRP by directly adjusting the interest rate of digital currency to stimulate consumption, investment, and output and to accelerate macroeconomic recovery. (iii) Welfare analysis shows that the central bank can effectively choose different NIRP rules according to the economic objectives.     

Banks and the real economy: An assessment of the research

We review research on the effects of banks on the real economy, including, but not limited to articles in this Special Issue of the Journal of Corporate Finance. We focus primarily on US and European policy interventions that provide quasi-natural experiments with relatively exogenous shocks to bank output. We concentrate on single-country settings, avoiding potentially confounding differences in language, culture, law, currency, and so on, that complicate cross-country investigations. We also largely avoid the effects of financial crises, which are not exogenous to the banking system. The evidence strongly suggests positive effects of banks on the real economy.     

中国央行数字货币的设计机制及潜在影响研究--基于央行数字货币专利申请的分析

本文基于央行数字货币专利申请信息和相关专家公开论述,系统分析了央行数字货币的设计演变、双层投放体系及其对金融体系、政策调控的潜在影响。研究认为,央行数字货币在中心化、双层投放体系设计下,定位于现金替代,对商业银行存款挤出及货币乘数影响较小。央行数字货币在保护用户隐私、提高监管能力、降低交易成本和简化跨境支付方面有着显著优势,对现有第三方支付业务产生替代效应。央行数字货币也会影响以支付为重要入口的金融科技业务和数字金融解决方案输出业务的发展,但若数字货币支付交易数据能够在保证安全和隐私的前提下,向金融科技企业和金融机构开放数据分析接口,则有利于打破数据孤岛,推动金融科技业务和金融数字化转型更好更快发展。     

De facto exchange rate regimes and currency crises: Are pegged regimes with capital account liberalization really more prone to speculative attacks?

This paper empirically examines whether de facto exchange rate regimes affect the occurrence of currency crises in 84 countries over the 1980–2001 period by using the probit model. We employ the de facto classification of Reinhart and Rogoff (2004) that allows us to estimate the impact of relatively long-lived exchange rate regimes on currency crises with much greater precision. We find that pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes. By using the combined data of exchange rate regimes and the existence of capital controls, we also find interesting evidence that pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes. These results are robust to a wide variety of samples and models. From the standpoint of the macroeconomic policy trilemma, we can conjecture that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by abandoning monetary policy autonomy.     

Central bank intervention and exchange rates: the case of Sweden

This paper examines the effect of the Riksbank's currency market interventions on the level and volatility of the SEK/USD and SEK/DEM exchange rates between 1993 and 1996. This is the first study investigating effects on the Swedish krona after the currency peg was abandoned in 1992. To model volatility, both GARCH models and implied volatilities from currency options are used. Some support is found for the idea that interventions affect the exchange-rate level during certain sub periods but, overall, the results are weak. Furthermore, in line with the findings for other countries, little empirical support is found for the hypothesis that central bank intervention systematically decreases exchange rate volatility.