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Crises |
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Crises happen. Although we may prefer to classify crises into different categories, most of the crises are closely related. For instance, during the Asian Financial Crisis, we also see a banking crisis. Many theoretical models have been proposed to explain the occurence of crises. Notably, Paul Krugman (1977) was among the pioneer to explain the occurence of speculative attack on a currency (i.e., a currency crisis). This so-called first-generation currency crisis model suggested that crises are the result of inconsistency between domestic policies and the attempt to maintain a fixed exchange rate. The second-generation currency crisis models, on the other hand, suggested that crises may simply be the result of self-fulfilling prophecy, which can happen even though the economic fundamentals are sound. After the Asian Financial Crisis, a third generation model has been proposed. Krugman (2001) proposed the fourth generation model.
There are more models to explain the banking and other crises.
The models to explain the currency / banking /financial crises have gone through several generation because the previous models are inadequate to explain the new crises. According to Krugman (2001), these generations "highlighted the somewhat disheartening fact that each wave of crises seems to elicit a new style of model, one that makes sense of hte crisis after the fact." Though "disheartening", one should not be surprised to see the evolution of the nature of crises and models built to explain them. After all, after the development of the economic theory, the economy and policy makers should be able to learn from the economic theory, and hence prescribe the appropriate medicine to avoid the crises that have been previously widely discussed. |
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Keywords:
Banking crises, Currency crises, Financial crises |
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International Financial Encyclopaedia |
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It's an interactive Financial Encyclopaedia which is the courtesy of Investor's Galleria. It presents very brief entries which help if no other source of information is available. This dictionary includes a number of Standard terms which are accepted by a major standards setting body such as the International Standards Organisation. |
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FOREX NEWS: Foreign Exchange and Currency Trading Information |
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This is an online source for foreign exchange (forex) information like news, analysis, articles, ideas , global calendar, forex charts, etc. Subscription to Forex News can get in-depth foreign exchange market analyses via e-mail, no fee is charged. |
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Offshore Investing Glossary |
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Offshore investing glossary includes special terms and proper nouns like Bank of International Settlements, World Bank, Controlled Foreign Corporation, FPHC and FIRPTA, etc. There are five other versions: Deutsch, Spanish, French, Italian and Nederlands. |
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Offshore Investing Glossary |
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Offshore investing glossary includes special terms and proper nouns like Bank of International Settlements, World Bank, Controlled Foreign Corporation, FPHC and FIRPTA, etc. There are five other versions: Deutsch, Spanish, French, Italian and Nederlands. |
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It's an interactive Financial Encyclopaedia which is the courtesy of Investor's Galleria. It presents very brief entries which help if no other source of information is available. This dictionary includes a number of Standard terms which are accepted by a major standards setting body such as the International Standards Organisation. |
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FOREX NEWS: Foreign Exchange and Currency Trading Information |
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FOREX NEWS: Foreign Exchange and Currency Trading Information |
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Offshore Investing Glossary |
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International Financial Encyclopaedia |
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FOREX NEWS: Foreign Exchange and Currency Trading Information |
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Offshore Investing Glossary |
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References
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References related to Banking crises
(31 references
are shown.)
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INTERNATIONAL FINANCIAL CRISES: MYTHS AND REALITIES
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Author:
Anna J. Schwartz, who is a Research Associate at the National Bureau of Economic Research.
Book: The Cato Journal |
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Year:
Winter 1998 Vol: Vol.17 No.3 |
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This article concentrates on the interconnection of Financial and Currency Crises. Two myths are mentioned:
One myth is that the individual country's loss of creditworthiness has a tequila effect. The supposed tequila effect is that other countries without the problems of the troubled country are unfairly tarnished as also subject to those problems. In this way, it is said, contagion spreads the crisis from its initial source to other innocent victims.
The second myth is that a bailout of the troubled country is essential. The rationale is again the idea of contagion. Failure to organize a bailout will create an international financial crisis by a domino effect. Rescuing the troubled country saves the rest of the world from unwarranted financial collapse.
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Remarks:
The article is accessible on: http://www.cato.org/pubs/journal/cj17n3-3.html |
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Foreign Direct Investors in Three Financial Crises
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Author:
Robert E. Lipsey
Book: NBER Working Paper |
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Year:
January 2001 Vol: No. W8084 |
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In each of three financial and exchange rate crises, Latin America in 1982, Mexico in 1994, and East Asia in 1997, direct investment inflows into the affected countries have behaved differently from other forms of investment, and U.S. manufacturing affiliates have behaved differently from other firms in their host countries. Inflows of direct investment into the crisis countries have been much more stable than inflows of portfolio or other forms of investment. U.S. manufacturing affiliates have switched their sales from host-country to export markets to a greater extent and for a longer period than other host-country firms. They have switched markets partly by more sharply curtailing their local sales, at least in terms of U.S. dollar values. In the cases where we have the data, U.S. affiliates have also tended to sustain their capital expenditure levels during the crises.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/W8084 |
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Capital Controls and Financial Crises
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Author:
Joshua Aizenman
Book: NBER Working Paper |
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Year:
October 1999 Vol: No. W7398
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The purpose of this paper is to explain the reluctance of developing countries to open up their capital market to foreigners, and the conditions inducing an emerging market economy to switch its policies. We consider an economy characterized initially by a one-sided openness to the capital market domestic agents can borrow internationally, but foreign agents cannot hold domestic equity. We identify conditions under which the emerging market's capitalists would oppose financial reform. This would be the case if 'green field' investment by multinationals would bid up real wages, reducing thereby the rents of domestic capitalists. A financial crisis that raises the domestic interest rate and causes a real exchange rate depreciation may induce the emerging market's capitalists to support opening up the economy to FDI. This attitude switch is more likely to occur the greater the debt overhang, the lower the borrowing constraint, and the weaker the market power of foreign entrepreneurs. Even in these circumstances, the emerging market's capitalists would prefer a partial reform to a comprehensive one -- they would prefer to maintain the restrictions on 'green field' FDI.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/w7398 |
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International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada
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Author:
John Murray, Mark Zelmer and Zahir Antia
Book: Technical Report |
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Year:
April 2000 Vol: No. 88 |
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This paper examines the behaviour of the Canadian dollar from 1997 to 1999 to see if there is any evidence of excess volatility or significant overshooting. A small econometric model of the exchange rate, based on market fundamentals, is presented and used to make tentative judgments about the extent to which the currency might have been systematically over- or undervalued. Three major conclusions emerge from the analysis. First, movements in world commodity prices and Canada-U.S. interest rate differentials can account for most of the observed variation in the value of the Canadian dollar. Any deviations that were recorded between actual and predicted values of the exchange rate were generally small and short-lived, suggesting that destabilizing speculative behaviour did not play a very important role in recent market developments. Second, while it is possible to explain most of the past movements in the Canadian dollar using a simple exchange rate equation, its ability to predict future movements in the exchange rate is limited due to the inherent instability of the fundamental variables guiding its behaviour. Exchange rate predictions, in short, are only as accurate as the forecasts of future commodity prices and interest rates. Third, it appears that periods of market turbulence are often dominated by fundamentalists as opposed to noise traders and are triggered typically by large external shocks. Monetary authorities should therefore be wary of resisting any movements in the exchange rate, since they are often part of a necessary and unavoidable adjustment process. Aggressive foreign exchange market intervention and other monetary policy actions designed to stabilize the exchange rate could easily prove counterproductive and subvert market efficiency. |
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Remarks:
This paper is accessible at: http://www.bankofcanada.ca/en/res/tr88-e.htm |
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Financial Crises in Emerging Markets: The Lessons from 1995
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Author:
Jeffrey Sachs, Aaron Tornell, Andres Velasco
Book: NBER Working Paper |
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Year:
May 1996 Vol: No. 5576 |
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In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5576 |
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Financial Crises : Understanding the Postwar U.S. Experience
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Author:
Martin H. Wolfson
Book: |
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Year:
January 1995 |
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Wolfson's classic account of financial crises in the US is thoroughly revised and updated throughout, not only in the new chapter that recounts the crises since publication of the first edition of 1986. However, Wolfson is moving away from the framework of the business cycle as he seeks to explain financial crises that do not occur at the business-cycle peak. Accordingly, two new chapters explore noncyclical theories of financial crises and develop significantly the analysis of institutional change only hinted at in the first edition. |
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Remarks:
The book can be ordered at www.amazon.com |
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Financial Crises and Asia CEPR Conference Report No. 6
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Author:
Robert Chote, Rapporteur
Book: |
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Year:
1998 |
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Asset price volatility on world financial markets and foreign exchange markets has increased significantly since the Mexican peso crisis of December 1994. The Asian financial crisis, still underway, will leave significant costs in its wake. The notion that emerging markets can sort out their own problems if left to their own devices is no longer plausible, and policymakers cannot afford to adopt a laissez-faire attitude to this issue. The traditional IMF response of containment is a debatable solution. This report addresses these issues with emphasis on the important lessons that can be learned from the recent events in Asia. |
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Remarks:
The paper can be ordered online at a price of $15.00/$22.50 at: http://www.brook.edu/press/books/clientpr/cepr/chote.htm |
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Banking crises in emerging economies: origins and policy options
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Author:
Morris Goldstein and Philip Turner
Book: Bank for International Settlements Economic Papers |
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Year:
October 1996 |
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This paper looks at banking crises in the developing world. It discusses eight major types of cause, including both macroeconomic and supervisory factors. It discusses policy options, drawing on actual experience in developing and developed economies. Contains international statistical comparisons. |
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Remarks:
The full document is downloadable at: http://www.bis.org/publ/econ46.htm |
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Banking crises in emerging economies: origins and policy options
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Author:
Morris Goldstein and Philip Turner
Book: Bank for International Settlements Economic Papers |
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Year:
October 1996 |
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This paper looks at banking crises in the developing world. It discusses eight major types of cause, including both macroeconomic and supervisory factors. It discusses policy options, drawing on actual experience in developing and developed economies. Contains international statistical comparisons. |
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Remarks:
The full document is downloadable at: http://www.bis.org/publ/econ46.htm |
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Are All Banking Crises Alike? The Japanese Experience in International Comparison
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Author:
Michael Hutchison, Kathleen McDill
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7253 |
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This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. By a host of criteria, Japan appeared to be in a stronger position than most countries at the onset of banking problems low inflation, appreciating currency, balanced government budget, and large external surpluses. However, Japan followed a clear international boom-and-bust pattern in terms of real output growth, credit growth and stock price movements. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. In particular, the likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and 'moral hazard' problem (financial liberalization combined with explicit deposit insurance). The Japanese case is also noteworthy by the long duration of the banking crisis, the length of the coincident recession and general malaise over the economy, the slow regulatory response, and the long delay in the commitment of public funds to re-capitalize the banking sector.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W7253 |
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Are All Banking Crises Alike? The Japanese Experience in International Comparison
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Author:
Michael Hutchison, Kathleen McDill
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7253 |
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This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. By a host of criteria, Japan appeared to be in a stronger position than most countries at the onset of banking problems low inflation, appreciating currency, balanced government budget, and large external surpluses. However, Japan followed a clear international boom-and-bust pattern in terms of real output growth, credit growth and stock price movements. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. In particular, the likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and 'moral hazard' problem (financial liberalization combined with explicit deposit insurance). The Japanese case is also noteworthy by the long duration of the banking crisis, the length of the coincident recession and general malaise over the economy, the slow regulatory response, and the long delay in the commitment of public funds to re-capitalize the banking sector.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W7253 |
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Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises
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Author:
Barry Eichengreen, Andrew K. Rose
Book: NBER working paper |
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Year:
January 1998 Vol: No. W6370 |
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We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors. A one percent increase in Northern interest rates is associated with an increase in the probability of Southern banking crises of around three percent. Our results also seem insensitive to the effects of differing exchange rate regimes, external debt burdens and domestic financial structures.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W6370 |
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Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises
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Author:
Barry Eichengreen, Andrew K. Rose
Book: NBER working paper |
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Year:
January 1998 Vol: No. W6370 |
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We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors. A one percent increase in Northern interest rates is associated with an increase in the probability of Southern banking crises of around three percent. Our results also seem insensitive to the effects of differing exchange rate regimes, external debt burdens and domestic financial structures.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W6370 |
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Contagious Currency Crises
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Author:
Barry Eichengreen, Andrew K. Rose, Charles Wyplosz
Book: NBER Working Paper |
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Year:
July 1996 Vol: No. W5681 |
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This paper is concerned with the fact that the incidence of speculative attacks tends to be temporally correlated; that is, currency crises appear to pass contagiously from one country to another. The paper provides a survey of the theoretical literature, and analyzes the contagious nature of currency crises empirically. Using thirty years of panel data from twenty industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries which are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5681 |
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Currency Crises and Foreign Reserves: A Simple Model
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Author:
Piti Disyatat
Book: IMF working paper |
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Year:
Feb 2001 |
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This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crises is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves in then determined endangeously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a crdit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria. |
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Remarks:
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Contagion and Trade: Why Are Currency Crises Regional?
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Author:
Reuven Glick, Andrew K. Rose
Book: NBER Working Paper |
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Year:
November 1998 Vol: No. W6806 |
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Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994, and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.
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Remarks:
Paper in PDF format is downloadable at: http://nberws.nber.org/papers/W6806 |
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Fundamentals, Contagion and Currency Crises: An Empirical Analysis
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Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada, Working paper |
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Year:
July 1998 Vol: Working Paper 98-10 |
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This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fundamentals? Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a measure of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion effects as well as the speculative behaviour of investors may be important determinants. |
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Remarks:
The paper in PDF format is downloadable at: http://www.bankofcanada.ca/en/res/wp98-10.htm |
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Banking and currency crises: how common are twins?
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Author:
Reuven Glick; Michael Hutchison
Book: Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series |
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Year:
1999 Vol: number 99-07
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The coincidence of banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-97 period. We measure the individual and joint ("twin") occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other. ; We find that the twin crisis phenomenon is most common in financially liberalized emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not old, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises.
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Remarks:
The paper in PDF format is downloadable at: http://ideas.uqam.ca/ideas/data/Papers/fipfedfpb99-07.html |
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Untitled Document
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Banking and currency crises: how common are twins?
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Author:
Reuven Glick; Michael Hutchison
Book: Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series |
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Year:
1999 Vol: number 99-07
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The coincidence of banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-97 period. We measure the individual and joint ("twin") occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other. ; We find that the twin crisis phenomenon is most common in financially liberalized emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not old, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises.
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Remarks:
The paper in PDF format is downloadable at: http://ideas.uqam.ca/ideas/data/Papers/fipfedfpb99-07.html |
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Currency Crises, Sunspots and Markov-Switching Regimes
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Author:
Paul Masson
Book: Journal of International Economics |
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Year:
January 1999 |
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This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotice dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to that data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.
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Remarks:
Paper in PDF format is downloadable at: http://www.brook.edu/views/papers/masson/20000401.htm |
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Currency crises and fixed exchange rates in the 1990s: A review
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Author:
Patrick Osakwe and Lawrence Schembri
Book: Bank of Canada Review article |
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Year:
Autumn 1998 |
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Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.
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Remarks:
The paper is downloadable at: http://www.bankofcanada.ca/en/res/r984b-ea.htm |
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Political Contagion in Currency Crises
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Author:
Allan Drazen
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7211 |
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Existing models of contagious currency crises are summarized and surveyed, and it is argued that more weight should be put on political factors. Towards this end, the concept of political contagion introduced, whereby contagion in speculative attacks across currencies arises solely because of political objectives of countries. A specific model of membership' contagion is presented. The desire to be part of a political-economic union, where maintaining a fixed exchange rate is a condition for membership and where the value of membership depends positively on who else is a member, is shown to give rise to potential contagion. We then present evidence suggesting that political contagion may have been important in the 1992-3 EMS crisis.
This paper is available in PDF |
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/w7211 |
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Are Currency Crises Predictable? A Test
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Author:
Andrew Berg and Catherine Pattillo
Book: IMF staff paper |
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Year:
June 1999 Vol: Volume 46, Number 2 |
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This paper evaluates three models for predicting currency crises that were proposed before 1997. The idea is to answer the question: if we had been using these models in late 1996, how well armed would we have been to predict the Asian crisis? The results are mixed. Two of the models fail to provide useful forecasts. One model provides forecasts that are somewhat informative though still not reliable. Plausible modifications to this model improve its performance, providing some hope that future models may do better. This exercise suggests, though, that while forecasting models may help indicate vulnerability to crisis, the predictive power of even the best of them may be limited. |
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Remarks:
The paper is downloadable at: http://www.imf.org/external/Pubs/FT/staffp/1999/06-99/berg.htm |
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Corporate Leverage and Currency Crises
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Author:
Arturo Bris & Yrjo Koskinen
Book: Scandinavian Working Paper Series in Economics and Finance |
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Year:
March 17, 2000 Vol: No 367 |
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This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending a fixed exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues are in a foreign currency and costs are at least partially in domestic. Interestingly, foreign borrowing by exporting firms doesn't change the qualitative results: if firms' debt is denominated in foreign currency, a larger depreciation is needed to restore incentives to invest. An important feature in our model is that in general exporting firms choose to finance investments with debt instead of equity. Currency depreciation is socially optimal if risky projects have a higher expected return than safe projects and if firms are forced to rely on debt financing because of underdeveloped equity markets. Although currency depreciation is always ex-post optimal, it can be harmful ex-ante. Exporting firms know that the government will let the currency depreciate, if their risky investments have failed. This leads to excessive investment in risky projects even if more valuable safe projects are available |
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Remarks:
The paper is downloadable at: http://swopec.hhs.se/hastef/abs/hastef0367.htm |
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Fundamentals, Contagion and Currency Crises:
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Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada Working Paper |
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Year:
July 1998 Vol: Bank of Canada Working Paper |
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This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fun-damentals?
Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a meas-ure
of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally
not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the
idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion
effects as well as the speculative behaviour of investors may be important determinants. |
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Remarks:
The paper is downloadable at: http://collection.nlc-bnc.ca/100/200/301/bankc-wp/1998/98-10/wp98-10.pdf |
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Currency and Banking Crises: The Early Warnings of Distress
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Author:
Graciela L. Kaminsky
Book: The Federal Reserve Board International Finance Discussion Papers |
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Year:
1998 |
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The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample. |
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Remarks:
http://www.federalreserve.gov/pubs/ifdp/1998/629/default.htm |
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Currency and Banking Crises: The Early Warnings of Distress
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Author:
Graciela L. Kaminsky
Book: The Federal Reserve Board International Finance Discussion Papers |
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Year:
1998 |
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The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample. |
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Remarks:
http://www.federalreserve.gov/pubs/ifdp/1998/629/default.htm |
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Managing Currency Crises in Emerging Markets
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Author:
Michael Dooley and Jeffrey Frankel, Editors
Book: Managing Currency Crises in Emerging Markets |
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Year:
March, 2001 |
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This book collects a number of papers published during the conference which was held March 28-31, 2001. Some of them are downloadable while some are still undergoing update process. |
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Remarks:
http://nber.com/books/mgmtcrises/ |
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Leading Indicators of Currency Crises in Emerging Economies
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Author:
O. Burkart
Book: The 20th International Symposium on Forecasting |
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Year:
2000 |
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This study identifies common features of currency crises in 15 emerging countries over the period 1980-1998. By analyzing such features, we build an early-warning system aimed at predicting looming crises in probabilistic terms. This work departs from the existing literature in several ways. First, we use quarterly data, in contrast to other studies, which are based on monthly or annual data. This allows us to characterize crises more accurately and also to analyze the behavior of leading indicators as actual crises approach. Second, the overvaluation of currencies is assessed by using real effective exchange rates, instead of the usual bilateral rates. In addition, capital controls dummies are included in the set of explanatory variables and contagion indicators are constructed. Finally, we use the Fisher linear discriminant analysis technique. The model yields a relatively good - and unbiased - ratio of correct predictions: four out of five crises are predicted correctly and only one out of five non-crises is predicted as a crisis. These results compare favorably to those of other models. For early warning systems, there exists a fundamental trade-off based on the Bayes’ formula in a context of rare events: to a certain extent, one has to choose between a high ratio of good classifications of crises and a low ratio of false alarms. Furthermore, using Bayes’ formula allows us to calculate the posterior probability that a given emerging economy will be in a period of currency crisis within a one-year horizon.
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Remarks:
Paper is obtainable upon request: http://isf2000.deio.fc.ul.pt/absview.asp?AbsID=159 |
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European Currency Crises and After
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Author:
Christian Bordes-Marcilloux (Editor), Eric Girardin (Editor), Jacques Melitz (Editor), Christian Bordes (Editor)
Book: European Currency Crises and After
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Year:
May 1995 Vol: 253 pages |
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Responding to questions raised by the speculative crises of 1992-93, which shook the European Monetary System (EMS) during Europe's worst postwar recession, 11 contributed chapters examine recent theoretical models of exchange rate target zones, exchange rate crises, and central bank credibility. They also examine the empirical evidence of misalignment, the efficiency of central bank intervention by the G3, measures of exchange rate risk under wide official bands, the exchange rate crises in 1992-93, and central bank behavior in the EMS. For students and teachers of international finance, international monetary economics, and monetary policy. |
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Remarks:
It can be ordered via Amazon: http://halljobs.com/finance/359.shtml |
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Does a Thin Foreign-Exchange Market Lead to Destabilizing Capital-Market Speculations in the Asian Crisis Countries?
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Author:
Hong G. Min and Judith A. McDonald
Book: |
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Year:
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This paper investigates how the thinness of foreign-exchange markets causes destabilizing speculations, especially when exchange-rate flexibility is increased as in the Asian crisis countries. In what follows, we analyze the impact of this foreign-exchange market thinness on the dynamic capital mobility and capital-market risk of four Asian crisis countries: Indonesia, Korea, Malaysia, and Thailand. Using the vector-autoregression model, impulse response functions, and variance decomposition, it is shown that in response to one-standard-deviation shock to interest and exchange rates, the dynamic capital mobility of all four crisis countries has decreased in the short run. These
shocks also cause the capital-market risk of these countries to increase.
Since the onset of the crisis, the Asian crisis countries responded by increasing their interest rates and devaluing their currencies. These measures are intended to stem capital
flight from the borrowing countries and to encourage capital inflows. However, in an environment of protracted financial-sector reform and thin foreign-exchange markets, these standard policies did not stabilize the capital inflows into these crisis countries. Our research supports the view that because the standard policies were not able to change institutional investors’ (self-fulfilling) expectations and their herding behavior, the Asian crisis countries’ policies have -- in the short run -- not been successful. This failure is in
large part attributable to the very thin foreign-exchange markets of these Asian countries. |
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Remarks:
The full version of the paper can be downloaded at: http://www.worldbank.org/research/pdffiles/wps2056.pdf |
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References related to Currency crises
(40 references
are shown.)
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INTERNATIONAL FINANCIAL CRISES: MYTHS AND REALITIES
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Author:
Anna J. Schwartz, who is a Research Associate at the National Bureau of Economic Research.
Book: The Cato Journal |
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Year:
Winter 1998 Vol: Vol.17 No.3 |
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This article concentrates on the interconnection of Financial and Currency Crises. Two myths are mentioned:
One myth is that the individual country's loss of creditworthiness has a tequila effect. The supposed tequila effect is that other countries without the problems of the troubled country are unfairly tarnished as also subject to those problems. In this way, it is said, contagion spreads the crisis from its initial source to other innocent victims.
The second myth is that a bailout of the troubled country is essential. The rationale is again the idea of contagion. Failure to organize a bailout will create an international financial crisis by a domino effect. Rescuing the troubled country saves the rest of the world from unwarranted financial collapse.
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Remarks:
The article is accessible on: http://www.cato.org/pubs/journal/cj17n3-3.html |
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Foreign Direct Investors in Three Financial Crises
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Author:
Robert E. Lipsey
Book: NBER Working Paper |
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Year:
January 2001 Vol: No. W8084 |
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In each of three financial and exchange rate crises, Latin America in 1982, Mexico in 1994, and East Asia in 1997, direct investment inflows into the affected countries have behaved differently from other forms of investment, and U.S. manufacturing affiliates have behaved differently from other firms in their host countries. Inflows of direct investment into the crisis countries have been much more stable than inflows of portfolio or other forms of investment. U.S. manufacturing affiliates have switched their sales from host-country to export markets to a greater extent and for a longer period than other host-country firms. They have switched markets partly by more sharply curtailing their local sales, at least in terms of U.S. dollar values. In the cases where we have the data, U.S. affiliates have also tended to sustain their capital expenditure levels during the crises.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/W8084 |
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Capital Controls and Financial Crises
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Author:
Joshua Aizenman
Book: NBER Working Paper |
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Year:
October 1999 Vol: No. W7398
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The purpose of this paper is to explain the reluctance of developing countries to open up their capital market to foreigners, and the conditions inducing an emerging market economy to switch its policies. We consider an economy characterized initially by a one-sided openness to the capital market domestic agents can borrow internationally, but foreign agents cannot hold domestic equity. We identify conditions under which the emerging market's capitalists would oppose financial reform. This would be the case if 'green field' investment by multinationals would bid up real wages, reducing thereby the rents of domestic capitalists. A financial crisis that raises the domestic interest rate and causes a real exchange rate depreciation may induce the emerging market's capitalists to support opening up the economy to FDI. This attitude switch is more likely to occur the greater the debt overhang, the lower the borrowing constraint, and the weaker the market power of foreign entrepreneurs. Even in these circumstances, the emerging market's capitalists would prefer a partial reform to a comprehensive one -- they would prefer to maintain the restrictions on 'green field' FDI.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/w7398 |
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International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada
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Author:
John Murray, Mark Zelmer and Zahir Antia
Book: Technical Report |
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Year:
April 2000 Vol: No. 88 |
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This paper examines the behaviour of the Canadian dollar from 1997 to 1999 to see if there is any evidence of excess volatility or significant overshooting. A small econometric model of the exchange rate, based on market fundamentals, is presented and used to make tentative judgments about the extent to which the currency might have been systematically over- or undervalued. Three major conclusions emerge from the analysis. First, movements in world commodity prices and Canada-U.S. interest rate differentials can account for most of the observed variation in the value of the Canadian dollar. Any deviations that were recorded between actual and predicted values of the exchange rate were generally small and short-lived, suggesting that destabilizing speculative behaviour did not play a very important role in recent market developments. Second, while it is possible to explain most of the past movements in the Canadian dollar using a simple exchange rate equation, its ability to predict future movements in the exchange rate is limited due to the inherent instability of the fundamental variables guiding its behaviour. Exchange rate predictions, in short, are only as accurate as the forecasts of future commodity prices and interest rates. Third, it appears that periods of market turbulence are often dominated by fundamentalists as opposed to noise traders and are triggered typically by large external shocks. Monetary authorities should therefore be wary of resisting any movements in the exchange rate, since they are often part of a necessary and unavoidable adjustment process. Aggressive foreign exchange market intervention and other monetary policy actions designed to stabilize the exchange rate could easily prove counterproductive and subvert market efficiency. |
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Remarks:
This paper is accessible at: http://www.bankofcanada.ca/en/res/tr88-e.htm |
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Financial Crises in Emerging Markets: The Lessons from 1995
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Author:
Jeffrey Sachs, Aaron Tornell, Andres Velasco
Book: NBER Working Paper |
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Year:
May 1996 Vol: No. 5576 |
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In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5576 |
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Financial Crises : Understanding the Postwar U.S. Experience
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Author:
Martin H. Wolfson
Book: |
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Year:
January 1995 |
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Wolfson's classic account of financial crises in the US is thoroughly revised and updated throughout, not only in the new chapter that recounts the crises since publication of the first edition of 1986. However, Wolfson is moving away from the framework of the business cycle as he seeks to explain financial crises that do not occur at the business-cycle peak. Accordingly, two new chapters explore noncyclical theories of financial crises and develop significantly the analysis of institutional change only hinted at in the first edition. |
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Remarks:
The book can be ordered at www.amazon.com |
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Financial Crises and Asia CEPR Conference Report No. 6
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Author:
Robert Chote, Rapporteur
Book: |
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Year:
1998 |
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Asset price volatility on world financial markets and foreign exchange markets has increased significantly since the Mexican peso crisis of December 1994. The Asian financial crisis, still underway, will leave significant costs in its wake. The notion that emerging markets can sort out their own problems if left to their own devices is no longer plausible, and policymakers cannot afford to adopt a laissez-faire attitude to this issue. The traditional IMF response of containment is a debatable solution. This report addresses these issues with emphasis on the important lessons that can be learned from the recent events in Asia. |
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Remarks:
The paper can be ordered online at a price of $15.00/$22.50 at: http://www.brook.edu/press/books/clientpr/cepr/chote.htm |
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Banking crises in emerging economies: origins and policy options
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Author:
Morris Goldstein and Philip Turner
Book: Bank for International Settlements Economic Papers |
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Year:
October 1996 |
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This paper looks at banking crises in the developing world. It discusses eight major types of cause, including both macroeconomic and supervisory factors. It discusses policy options, drawing on actual experience in developing and developed economies. Contains international statistical comparisons. |
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Remarks:
The full document is downloadable at: http://www.bis.org/publ/econ46.htm |
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Are All Banking Crises Alike? The Japanese Experience in International Comparison
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Author:
Michael Hutchison, Kathleen McDill
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7253 |
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This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. By a host of criteria, Japan appeared to be in a stronger position than most countries at the onset of banking problems low inflation, appreciating currency, balanced government budget, and large external surpluses. However, Japan followed a clear international boom-and-bust pattern in terms of real output growth, credit growth and stock price movements. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. In particular, the likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and 'moral hazard' problem (financial liberalization combined with explicit deposit insurance). The Japanese case is also noteworthy by the long duration of the banking crisis, the length of the coincident recession and general malaise over the economy, the slow regulatory response, and the long delay in the commitment of public funds to re-capitalize the banking sector.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W7253 |
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Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises
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Author:
Barry Eichengreen, Andrew K. Rose
Book: NBER working paper |
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Year:
January 1998 Vol: No. W6370 |
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We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors. A one percent increase in Northern interest rates is associated with an increase in the probability of Southern banking crises of around three percent. Our results also seem insensitive to the effects of differing exchange rate regimes, external debt burdens and domestic financial structures.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W6370 |
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Contagious Currency Crises
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Author:
Barry Eichengreen, Andrew K. Rose, Charles Wyplosz
Book: NBER Working Paper |
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Year:
July 1996 Vol: No. W5681 |
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This paper is concerned with the fact that the incidence of speculative attacks tends to be temporally correlated; that is, currency crises appear to pass contagiously from one country to another. The paper provides a survey of the theoretical literature, and analyzes the contagious nature of currency crises empirically. Using thirty years of panel data from twenty industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries which are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5681 |
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Contagious Currency Crises
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Author:
Barry Eichengreen, Andrew K. Rose, Charles Wyplosz
Book: NBER Working Paper |
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Year:
July 1996 Vol: No. W5681 |
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This paper is concerned with the fact that the incidence of speculative attacks tends to be temporally correlated; that is, currency crises appear to pass contagiously from one country to another. The paper provides a survey of the theoretical literature, and analyzes the contagious nature of currency crises empirically. Using thirty years of panel data from twenty industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries which are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5681 |
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Currency Crises and Foreign Reserves: A Simple Model
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Author:
Piti Disyatat
Book: IMF working paper |
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Year:
Feb 2001 |
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This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crises is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves in then determined endangeously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a crdit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria. |
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Currency Crises and Foreign Reserves: A Simple Model
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Author:
Piti Disyatat
Book: IMF working paper |
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Year:
Feb 2001 |
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This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crises is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves in then determined endangeously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a crdit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria. |
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Contagion and Trade: Why Are Currency Crises Regional?
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Author:
Reuven Glick, Andrew K. Rose
Book: NBER Working Paper |
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Year:
November 1998 Vol: No. W6806 |
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Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994, and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.
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Remarks:
Paper in PDF format is downloadable at: http://nberws.nber.org/papers/W6806 |
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Contagion and Trade: Why Are Currency Crises Regional?
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Author:
Reuven Glick, Andrew K. Rose
Book: NBER Working Paper |
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Year:
November 1998 Vol: No. W6806 |
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Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994, and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.
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Remarks:
Paper in PDF format is downloadable at: http://nberws.nber.org/papers/W6806 |
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Fundamentals, Contagion and Currency Crises: An Empirical Analysis
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Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada, Working paper |
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Year:
July 1998 Vol: Working Paper 98-10 |
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This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fundamentals? Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a measure of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion effects as well as the speculative behaviour of investors may be important determinants. |
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Remarks:
The paper in PDF format is downloadable at: http://www.bankofcanada.ca/en/res/wp98-10.htm |
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Untitled Document
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Fundamentals, Contagion and Currency Crises: An Empirical Analysis
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Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada, Working paper |
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Year:
July 1998 Vol: Working Paper 98-10 |
| |
This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fundamentals? Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a measure of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion effects as well as the speculative behaviour of investors may be important determinants. |
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Remarks:
The paper in PDF format is downloadable at: http://www.bankofcanada.ca/en/res/wp98-10.htm |
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Untitled Document
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Banking and currency crises: how common are twins?
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Author:
Reuven Glick; Michael Hutchison
Book: Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series |
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Year:
1999 Vol: number 99-07
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The coincidence of banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-97 period. We measure the individual and joint ("twin") occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other. ; We find that the twin crisis phenomenon is most common in financially liberalized emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not old, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises.
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Remarks:
The paper in PDF format is downloadable at: http://ideas.uqam.ca/ideas/data/Papers/fipfedfpb99-07.html |
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Untitled Document
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Banking and currency crises: how common are twins?
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| |
Author:
Reuven Glick; Michael Hutchison
Book: Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series |
| |
Year:
1999 Vol: number 99-07
|
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The coincidence of banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-97 period. We measure the individual and joint ("twin") occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other. ; We find that the twin crisis phenomenon is most common in financially liberalized emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not old, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises.
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Remarks:
The paper in PDF format is downloadable at: http://ideas.uqam.ca/ideas/data/Papers/fipfedfpb99-07.html |
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Currency Crises, Sunspots and Markov-Switching Regimes
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Author:
Paul Masson
Book: Journal of International Economics |
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Year:
January 1999 |
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This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotice dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to that data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.
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Remarks:
Paper in PDF format is downloadable at: http://www.brook.edu/views/papers/masson/20000401.htm |
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Currency Crises, Sunspots and Markov-Switching Regimes
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Author:
Paul Masson
Book: Journal of International Economics |
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Year:
January 1999 |
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This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotice dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to that data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.
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Remarks:
Paper in PDF format is downloadable at: http://www.brook.edu/views/papers/masson/20000401.htm |
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Currency crises and fixed exchange rates in the 1990s: A review
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Author:
Patrick Osakwe and Lawrence Schembri
Book: Bank of Canada Review article |
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Year:
Autumn 1998 |
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Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.
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Remarks:
The paper is downloadable at: http://www.bankofcanada.ca/en/res/r984b-ea.htm |
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Untitled Document
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Currency crises and fixed exchange rates in the 1990s: A review
|
| |
Author:
Patrick Osakwe and Lawrence Schembri
Book: Bank of Canada Review article |
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Year:
Autumn 1998 |
| |
Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.
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Remarks:
The paper is downloadable at: http://www.bankofcanada.ca/en/res/r984b-ea.htm |
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Untitled Document
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Political Contagion in Currency Crises
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Author:
Allan Drazen
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7211 |
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Existing models of contagious currency crises are summarized and surveyed, and it is argued that more weight should be put on political factors. Towards this end, the concept of political contagion introduced, whereby contagion in speculative attacks across currencies arises solely because of political objectives of countries. A specific model of membership' contagion is presented. The desire to be part of a political-economic union, where maintaining a fixed exchange rate is a condition for membership and where the value of membership depends positively on who else is a member, is shown to give rise to potential contagion. We then present evidence suggesting that political contagion may have been important in the 1992-3 EMS crisis.
This paper is available in PDF |
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/w7211 |
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Untitled Document
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Political Contagion in Currency Crises
|
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Author:
Allan Drazen
Book: NBER Working Paper |
| |
Year:
July 1999 Vol: No. W7211 |
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Existing models of contagious currency crises are summarized and surveyed, and it is argued that more weight should be put on political factors. Towards this end, the concept of political contagion introduced, whereby contagion in speculative attacks across currencies arises solely because of political objectives of countries. A specific model of membership' contagion is presented. The desire to be part of a political-economic union, where maintaining a fixed exchange rate is a condition for membership and where the value of membership depends positively on who else is a member, is shown to give rise to potential contagion. We then present evidence suggesting that political contagion may have been important in the 1992-3 EMS crisis.
This paper is available in PDF |
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/w7211 |
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Untitled Document
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Are Currency Crises Predictable? A Test
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Author:
Andrew Berg and Catherine Pattillo
Book: IMF staff paper |
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Year:
June 1999 Vol: Volume 46, Number 2 |
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This paper evaluates three models for predicting currency crises that were proposed before 1997. The idea is to answer the question: if we had been using these models in late 1996, how well armed would we have been to predict the Asian crisis? The results are mixed. Two of the models fail to provide useful forecasts. One model provides forecasts that are somewhat informative though still not reliable. Plausible modifications to this model improve its performance, providing some hope that future models may do better. This exercise suggests, though, that while forecasting models may help indicate vulnerability to crisis, the predictive power of even the best of them may be limited. |
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Remarks:
The paper is downloadable at: http://www.imf.org/external/Pubs/FT/staffp/1999/06-99/berg.htm |
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Untitled Document
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Are Currency Crises Predictable? A Test
|
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Author:
Andrew Berg and Catherine Pattillo
Book: IMF staff paper |
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Year:
June 1999 Vol: Volume 46, Number 2 |
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This paper evaluates three models for predicting currency crises that were proposed before 1997. The idea is to answer the question: if we had been using these models in late 1996, how well armed would we have been to predict the Asian crisis? The results are mixed. Two of the models fail to provide useful forecasts. One model provides forecasts that are somewhat informative though still not reliable. Plausible modifications to this model improve its performance, providing some hope that future models may do better. This exercise suggests, though, that while forecasting models may help indicate vulnerability to crisis, the predictive power of even the best of them may be limited. |
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Remarks:
The paper is downloadable at: http://www.imf.org/external/Pubs/FT/staffp/1999/06-99/berg.htm |
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Untitled Document
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Corporate Leverage and Currency Crises
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Author:
Arturo Bris & Yrjo Koskinen
Book: Scandinavian Working Paper Series in Economics and Finance |
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Year:
March 17, 2000 Vol: No 367 |
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This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending a fixed exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues are in a foreign currency and costs are at least partially in domestic. Interestingly, foreign borrowing by exporting firms doesn't change the qualitative results: if firms' debt is denominated in foreign currency, a larger depreciation is needed to restore incentives to invest. An important feature in our model is that in general exporting firms choose to finance investments with debt instead of equity. Currency depreciation is socially optimal if risky projects have a higher expected return than safe projects and if firms are forced to rely on debt financing because of underdeveloped equity markets. Although currency depreciation is always ex-post optimal, it can be harmful ex-ante. Exporting firms know that the government will let the currency depreciate, if their risky investments have failed. This leads to excessive investment in risky projects even if more valuable safe projects are available |
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Remarks:
The paper is downloadable at: http://swopec.hhs.se/hastef/abs/hastef0367.htm |
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Untitled Document
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Corporate Leverage and Currency Crises
|
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Author:
Arturo Bris & Yrjo Koskinen
Book: Scandinavian Working Paper Series in Economics and Finance |
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Year:
March 17, 2000 Vol: No 367 |
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This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending a fixed exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues are in a foreign currency and costs are at least partially in domestic. Interestingly, foreign borrowing by exporting firms doesn't change the qualitative results: if firms' debt is denominated in foreign currency, a larger depreciation is needed to restore incentives to invest. An important feature in our model is that in general exporting firms choose to finance investments with debt instead of equity. Currency depreciation is socially optimal if risky projects have a higher expected return than safe projects and if firms are forced to rely on debt financing because of underdeveloped equity markets. Although currency depreciation is always ex-post optimal, it can be harmful ex-ante. Exporting firms know that the government will let the currency depreciate, if their risky investments have failed. This leads to excessive investment in risky projects even if more valuable safe projects are available |
| |
Remarks:
The paper is downloadable at: http://swopec.hhs.se/hastef/abs/hastef0367.htm |
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Untitled Document
|
Fundamentals, Contagion and Currency Crises:
|
| |
Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada Working Paper |
| |
Year:
July 1998 Vol: Bank of Canada Working Paper |
| |
This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fun-damentals?
Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a meas-ure
of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally
not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the
idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion
effects as well as the speculative behaviour of investors may be important determinants. |
| |
Remarks:
The paper is downloadable at: http://collection.nlc-bnc.ca/100/200/301/bankc-wp/1998/98-10/wp98-10.pdf |
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Untitled Document
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Fundamentals, Contagion and Currency Crises:
|
| |
Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada Working Paper |
| |
Year:
July 1998 Vol: Bank of Canada Working Paper |
| |
This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fun-damentals?
Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a meas-ure
of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally
not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the
idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion
effects as well as the speculative behaviour of investors may be important determinants. |
| |
Remarks:
The paper is downloadable at: http://collection.nlc-bnc.ca/100/200/301/bankc-wp/1998/98-10/wp98-10.pdf |
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Untitled Document
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Currency and Banking Crises: The Early Warnings of Distress
|
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Author:
Graciela L. Kaminsky
Book: The Federal Reserve Board International Finance Discussion Papers |
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Year:
1998 |
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The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample. |
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Remarks:
http://www.federalreserve.gov/pubs/ifdp/1998/629/default.htm |
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Untitled Document
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Currency and Banking Crises: The Early Warnings of Distress
|
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Author:
Graciela L. Kaminsky
Book: The Federal Reserve Board International Finance Discussion Papers |
| |
Year:
1998 |
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The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample. |
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Remarks:
http://www.federalreserve.gov/pubs/ifdp/1998/629/default.htm |
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Untitled Document
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Managing Currency Crises in Emerging Markets
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Author:
Michael Dooley and Jeffrey Frankel, Editors
Book: Managing Currency Crises in Emerging Markets |
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Year:
March, 2001 |
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This book collects a number of papers published during the conference which was held March 28-31, 2001. Some of them are downloadable while some are still undergoing update process. |
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Remarks:
http://nber.com/books/mgmtcrises/ |
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Untitled Document
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Managing Currency Crises in Emerging Markets
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| |
Author:
Michael Dooley and Jeffrey Frankel, Editors
Book: Managing Currency Crises in Emerging Markets |
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Year:
March, 2001 |
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This book collects a number of papers published during the conference which was held March 28-31, 2001. Some of them are downloadable while some are still undergoing update process. |
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Remarks:
http://nber.com/books/mgmtcrises/ |
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Untitled Document
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Leading Indicators of Currency Crises in Emerging Economies
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Author:
O. Burkart
Book: The 20th International Symposium on Forecasting |
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Year:
2000 |
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This study identifies common features of currency crises in 15 emerging countries over the period 1980-1998. By analyzing such features, we build an early-warning system aimed at predicting looming crises in probabilistic terms. This work departs from the existing literature in several ways. First, we use quarterly data, in contrast to other studies, which are based on monthly or annual data. This allows us to characterize crises more accurately and also to analyze the behavior of leading indicators as actual crises approach. Second, the overvaluation of currencies is assessed by using real effective exchange rates, instead of the usual bilateral rates. In addition, capital controls dummies are included in the set of explanatory variables and contagion indicators are constructed. Finally, we use the Fisher linear discriminant analysis technique. The model yields a relatively good - and unbiased - ratio of correct predictions: four out of five crises are predicted correctly and only one out of five non-crises is predicted as a crisis. These results compare favorably to those of other models. For early warning systems, there exists a fundamental trade-off based on the Bayes’ formula in a context of rare events: to a certain extent, one has to choose between a high ratio of good classifications of crises and a low ratio of false alarms. Furthermore, using Bayes’ formula allows us to calculate the posterior probability that a given emerging economy will be in a period of currency crisis within a one-year horizon.
|
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Remarks:
Paper is obtainable upon request: http://isf2000.deio.fc.ul.pt/absview.asp?AbsID=159 |
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Untitled Document
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Leading Indicators of Currency Crises in Emerging Economies
|
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Author:
O. Burkart
Book: The 20th International Symposium on Forecasting |
| |
Year:
2000 |
| |
This study identifies common features of currency crises in 15 emerging countries over the period 1980-1998. By analyzing such features, we build an early-warning system aimed at predicting looming crises in probabilistic terms. This work departs from the existing literature in several ways. First, we use quarterly data, in contrast to other studies, which are based on monthly or annual data. This allows us to characterize crises more accurately and also to analyze the behavior of leading indicators as actual crises approach. Second, the overvaluation of currencies is assessed by using real effective exchange rates, instead of the usual bilateral rates. In addition, capital controls dummies are included in the set of explanatory variables and contagion indicators are constructed. Finally, we use the Fisher linear discriminant analysis technique. The model yields a relatively good - and unbiased - ratio of correct predictions: four out of five crises are predicted correctly and only one out of five non-crises is predicted as a crisis. These results compare favorably to those of other models. For early warning systems, there exists a fundamental trade-off based on the Bayes’ formula in a context of rare events: to a certain extent, one has to choose between a high ratio of good classifications of crises and a low ratio of false alarms. Furthermore, using Bayes’ formula allows us to calculate the posterior probability that a given emerging economy will be in a period of currency crisis within a one-year horizon.
|
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Remarks:
Paper is obtainable upon request: http://isf2000.deio.fc.ul.pt/absview.asp?AbsID=159 |
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Untitled Document
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European Currency Crises and After
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Author:
Christian Bordes-Marcilloux (Editor), Eric Girardin (Editor), Jacques Melitz (Editor), Christian Bordes (Editor)
Book: European Currency Crises and After
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Year:
May 1995 Vol: 253 pages |
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Responding to questions raised by the speculative crises of 1992-93, which shook the European Monetary System (EMS) during Europe's worst postwar recession, 11 contributed chapters examine recent theoretical models of exchange rate target zones, exchange rate crises, and central bank credibility. They also examine the empirical evidence of misalignment, the efficiency of central bank intervention by the G3, measures of exchange rate risk under wide official bands, the exchange rate crises in 1992-93, and central bank behavior in the EMS. For students and teachers of international finance, international monetary economics, and monetary policy. |
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Remarks:
It can be ordered via Amazon: http://halljobs.com/finance/359.shtml |
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Untitled Document
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Does a Thin Foreign-Exchange Market Lead to Destabilizing Capital-Market Speculations in the Asian Crisis Countries?
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Author:
Hong G. Min and Judith A. McDonald
Book: |
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Year:
|
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This paper investigates how the thinness of foreign-exchange markets causes destabilizing speculations, especially when exchange-rate flexibility is increased as in the Asian crisis countries. In what follows, we analyze the impact of this foreign-exchange market thinness on the dynamic capital mobility and capital-market risk of four Asian crisis countries: Indonesia, Korea, Malaysia, and Thailand. Using the vector-autoregression model, impulse response functions, and variance decomposition, it is shown that in response to one-standard-deviation shock to interest and exchange rates, the dynamic capital mobility of all four crisis countries has decreased in the short run. These
shocks also cause the capital-market risk of these countries to increase.
Since the onset of the crisis, the Asian crisis countries responded by increasing their interest rates and devaluing their currencies. These measures are intended to stem capital
flight from the borrowing countries and to encourage capital inflows. However, in an environment of protracted financial-sector reform and thin foreign-exchange markets, these standard policies did not stabilize the capital inflows into these crisis countries. Our research supports the view that because the standard policies were not able to change institutional investors’ (self-fulfilling) expectations and their herding behavior, the Asian crisis countries’ policies have -- in the short run -- not been successful. This failure is in
large part attributable to the very thin foreign-exchange markets of these Asian countries. |
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Remarks:
The full version of the paper can be downloaded at: http://www.worldbank.org/research/pdffiles/wps2056.pdf |
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Untitled Document
References related to Financial crises
(34 references
are shown.)
Untitled Document
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INTERNATIONAL FINANCIAL CRISES: MYTHS AND REALITIES
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Author:
Anna J. Schwartz, who is a Research Associate at the National Bureau of Economic Research.
Book: The Cato Journal |
| |
Year:
Winter 1998 Vol: Vol.17 No.3 |
| |
This article concentrates on the interconnection of Financial and Currency Crises. Two myths are mentioned:
One myth is that the individual country's loss of creditworthiness has a tequila effect. The supposed tequila effect is that other countries without the problems of the troubled country are unfairly tarnished as also subject to those problems. In this way, it is said, contagion spreads the crisis from its initial source to other innocent victims.
The second myth is that a bailout of the troubled country is essential. The rationale is again the idea of contagion. Failure to organize a bailout will create an international financial crisis by a domino effect. Rescuing the troubled country saves the rest of the world from unwarranted financial collapse.
|
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Remarks:
The article is accessible on: http://www.cato.org/pubs/journal/cj17n3-3.html |
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Untitled Document
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INTERNATIONAL FINANCIAL CRISES: MYTHS AND REALITIES
|
| |
Author:
Anna J. Schwartz, who is a Research Associate at the National Bureau of Economic Research.
Book: The Cato Journal |
| |
Year:
Winter 1998 Vol: Vol.17 No.3 |
| |
This article concentrates on the interconnection of Financial and Currency Crises. Two myths are mentioned:
One myth is that the individual country's loss of creditworthiness has a tequila effect. The supposed tequila effect is that other countries without the problems of the troubled country are unfairly tarnished as also subject to those problems. In this way, it is said, contagion spreads the crisis from its initial source to other innocent victims.
The second myth is that a bailout of the troubled country is essential. The rationale is again the idea of contagion. Failure to organize a bailout will create an international financial crisis by a domino effect. Rescuing the troubled country saves the rest of the world from unwarranted financial collapse.
|
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Remarks:
The article is accessible on: http://www.cato.org/pubs/journal/cj17n3-3.html |
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Untitled Document
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Foreign Direct Investors in Three Financial Crises
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Author:
Robert E. Lipsey
Book: NBER Working Paper |
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Year:
January 2001 Vol: No. W8084 |
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In each of three financial and exchange rate crises, Latin America in 1982, Mexico in 1994, and East Asia in 1997, direct investment inflows into the affected countries have behaved differently from other forms of investment, and U.S. manufacturing affiliates have behaved differently from other firms in their host countries. Inflows of direct investment into the crisis countries have been much more stable than inflows of portfolio or other forms of investment. U.S. manufacturing affiliates have switched their sales from host-country to export markets to a greater extent and for a longer period than other host-country firms. They have switched markets partly by more sharply curtailing their local sales, at least in terms of U.S. dollar values. In the cases where we have the data, U.S. affiliates have also tended to sustain their capital expenditure levels during the crises.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/W8084 |
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Foreign Direct Investors in Three Financial Crises
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Author:
Robert E. Lipsey
Book: NBER Working Paper |
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Year:
January 2001 Vol: No. W8084 |
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In each of three financial and exchange rate crises, Latin America in 1982, Mexico in 1994, and East Asia in 1997, direct investment inflows into the affected countries have behaved differently from other forms of investment, and U.S. manufacturing affiliates have behaved differently from other firms in their host countries. Inflows of direct investment into the crisis countries have been much more stable than inflows of portfolio or other forms of investment. U.S. manufacturing affiliates have switched their sales from host-country to export markets to a greater extent and for a longer period than other host-country firms. They have switched markets partly by more sharply curtailing their local sales, at least in terms of U.S. dollar values. In the cases where we have the data, U.S. affiliates have also tended to sustain their capital expenditure levels during the crises.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/W8084 |
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Untitled Document
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Capital Controls and Financial Crises
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Author:
Joshua Aizenman
Book: NBER Working Paper |
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Year:
October 1999 Vol: No. W7398
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The purpose of this paper is to explain the reluctance of developing countries to open up their capital market to foreigners, and the conditions inducing an emerging market economy to switch its policies. We consider an economy characterized initially by a one-sided openness to the capital market domestic agents can borrow internationally, but foreign agents cannot hold domestic equity. We identify conditions under which the emerging market's capitalists would oppose financial reform. This would be the case if 'green field' investment by multinationals would bid up real wages, reducing thereby the rents of domestic capitalists. A financial crisis that raises the domestic interest rate and causes a real exchange rate depreciation may induce the emerging market's capitalists to support opening up the economy to FDI. This attitude switch is more likely to occur the greater the debt overhang, the lower the borrowing constraint, and the weaker the market power of foreign entrepreneurs. Even in these circumstances, the emerging market's capitalists would prefer a partial reform to a comprehensive one -- they would prefer to maintain the restrictions on 'green field' FDI.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/w7398 |
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Untitled Document
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Capital Controls and Financial Crises
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Author:
Joshua Aizenman
Book: NBER Working Paper |
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Year:
October 1999 Vol: No. W7398
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The purpose of this paper is to explain the reluctance of developing countries to open up their capital market to foreigners, and the conditions inducing an emerging market economy to switch its policies. We consider an economy characterized initially by a one-sided openness to the capital market domestic agents can borrow internationally, but foreign agents cannot hold domestic equity. We identify conditions under which the emerging market's capitalists would oppose financial reform. This would be the case if 'green field' investment by multinationals would bid up real wages, reducing thereby the rents of domestic capitalists. A financial crisis that raises the domestic interest rate and causes a real exchange rate depreciation may induce the emerging market's capitalists to support opening up the economy to FDI. This attitude switch is more likely to occur the greater the debt overhang, the lower the borrowing constraint, and the weaker the market power of foreign entrepreneurs. Even in these circumstances, the emerging market's capitalists would prefer a partial reform to a comprehensive one -- they would prefer to maintain the restrictions on 'green field' FDI.
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Remarks:
The paper is available in PDF format at: http://papers.nber.org/papers/w7398 |
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Untitled Document
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International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada
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Author:
John Murray, Mark Zelmer and Zahir Antia
Book: Technical Report |
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Year:
April 2000 Vol: No. 88 |
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This paper examines the behaviour of the Canadian dollar from 1997 to 1999 to see if there is any evidence of excess volatility or significant overshooting. A small econometric model of the exchange rate, based on market fundamentals, is presented and used to make tentative judgments about the extent to which the currency might have been systematically over- or undervalued. Three major conclusions emerge from the analysis. First, movements in world commodity prices and Canada-U.S. interest rate differentials can account for most of the observed variation in the value of the Canadian dollar. Any deviations that were recorded between actual and predicted values of the exchange rate were generally small and short-lived, suggesting that destabilizing speculative behaviour did not play a very important role in recent market developments. Second, while it is possible to explain most of the past movements in the Canadian dollar using a simple exchange rate equation, its ability to predict future movements in the exchange rate is limited due to the inherent instability of the fundamental variables guiding its behaviour. Exchange rate predictions, in short, are only as accurate as the forecasts of future commodity prices and interest rates. Third, it appears that periods of market turbulence are often dominated by fundamentalists as opposed to noise traders and are triggered typically by large external shocks. Monetary authorities should therefore be wary of resisting any movements in the exchange rate, since they are often part of a necessary and unavoidable adjustment process. Aggressive foreign exchange market intervention and other monetary policy actions designed to stabilize the exchange rate could easily prove counterproductive and subvert market efficiency. |
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Remarks:
This paper is accessible at: http://www.bankofcanada.ca/en/res/tr88-e.htm |
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Untitled Document
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International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada
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Author:
John Murray, Mark Zelmer and Zahir Antia
Book: Technical Report |
| |
Year:
April 2000 Vol: No. 88 |
| |
This paper examines the behaviour of the Canadian dollar from 1997 to 1999 to see if there is any evidence of excess volatility or significant overshooting. A small econometric model of the exchange rate, based on market fundamentals, is presented and used to make tentative judgments about the extent to which the currency might have been systematically over- or undervalued. Three major conclusions emerge from the analysis. First, movements in world commodity prices and Canada-U.S. interest rate differentials can account for most of the observed variation in the value of the Canadian dollar. Any deviations that were recorded between actual and predicted values of the exchange rate were generally small and short-lived, suggesting that destabilizing speculative behaviour did not play a very important role in recent market developments. Second, while it is possible to explain most of the past movements in the Canadian dollar using a simple exchange rate equation, its ability to predict future movements in the exchange rate is limited due to the inherent instability of the fundamental variables guiding its behaviour. Exchange rate predictions, in short, are only as accurate as the forecasts of future commodity prices and interest rates. Third, it appears that periods of market turbulence are often dominated by fundamentalists as opposed to noise traders and are triggered typically by large external shocks. Monetary authorities should therefore be wary of resisting any movements in the exchange rate, since they are often part of a necessary and unavoidable adjustment process. Aggressive foreign exchange market intervention and other monetary policy actions designed to stabilize the exchange rate could easily prove counterproductive and subvert market efficiency. |
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Remarks:
This paper is accessible at: http://www.bankofcanada.ca/en/res/tr88-e.htm |
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Untitled Document
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Financial Crises in Emerging Markets: The Lessons from 1995
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Author:
Jeffrey Sachs, Aaron Tornell, Andres Velasco
Book: NBER Working Paper |
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Year:
May 1996 Vol: No. 5576 |
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In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5576 |
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Untitled Document
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Financial Crises in Emerging Markets: The Lessons from 1995
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Author:
Jeffrey Sachs, Aaron Tornell, Andres Velasco
Book: NBER Working Paper |
| |
Year:
May 1996 Vol: No. 5576 |
| |
In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5576 |
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Untitled Document
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Financial Crises : Understanding the Postwar U.S. Experience
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Author:
Martin H. Wolfson
Book: |
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Year:
January 1995 |
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Wolfson's classic account of financial crises in the US is thoroughly revised and updated throughout, not only in the new chapter that recounts the crises since publication of the first edition of 1986. However, Wolfson is moving away from the framework of the business cycle as he seeks to explain financial crises that do not occur at the business-cycle peak. Accordingly, two new chapters explore noncyclical theories of financial crises and develop significantly the analysis of institutional change only hinted at in the first edition. |
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Remarks:
The book can be ordered at www.amazon.com |
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Untitled Document
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Financial Crises : Understanding the Postwar U.S. Experience
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Author:
Martin H. Wolfson
Book: |
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Year:
January 1995 |
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Wolfson's classic account of financial crises in the US is thoroughly revised and updated throughout, not only in the new chapter that recounts the crises since publication of the first edition of 1986. However, Wolfson is moving away from the framework of the business cycle as he seeks to explain financial crises that do not occur at the business-cycle peak. Accordingly, two new chapters explore noncyclical theories of financial crises and develop significantly the analysis of institutional change only hinted at in the first edition. |
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Remarks:
The book can be ordered at www.amazon.com |
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Untitled Document
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Financial Crises and Asia CEPR Conference Report No. 6
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Author:
Robert Chote, Rapporteur
Book: |
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Year:
1998 |
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Asset price volatility on world financial markets and foreign exchange markets has increased significantly since the Mexican peso crisis of December 1994. The Asian financial crisis, still underway, will leave significant costs in its wake. The notion that emerging markets can sort out their own problems if left to their own devices is no longer plausible, and policymakers cannot afford to adopt a laissez-faire attitude to this issue. The traditional IMF response of containment is a debatable solution. This report addresses these issues with emphasis on the important lessons that can be learned from the recent events in Asia. |
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Remarks:
The paper can be ordered online at a price of $15.00/$22.50 at: http://www.brook.edu/press/books/clientpr/cepr/chote.htm |
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Untitled Document
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Financial Crises and Asia CEPR Conference Report No. 6
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Author:
Robert Chote, Rapporteur
Book: |
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Year:
1998 |
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Asset price volatility on world financial markets and foreign exchange markets has increased significantly since the Mexican peso crisis of December 1994. The Asian financial crisis, still underway, will leave significant costs in its wake. The notion that emerging markets can sort out their own problems if left to their own devices is no longer plausible, and policymakers cannot afford to adopt a laissez-faire attitude to this issue. The traditional IMF response of containment is a debatable solution. This report addresses these issues with emphasis on the important lessons that can be learned from the recent events in Asia. |
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Remarks:
The paper can be ordered online at a price of $15.00/$22.50 at: http://www.brook.edu/press/books/clientpr/cepr/chote.htm |
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Untitled Document
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Banking crises in emerging economies: origins and policy options
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Author:
Morris Goldstein and Philip Turner
Book: Bank for International Settlements Economic Papers |
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Year:
October 1996 |
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This paper looks at banking crises in the developing world. It discusses eight major types of cause, including both macroeconomic and supervisory factors. It discusses policy options, drawing on actual experience in developing and developed economies. Contains international statistical comparisons. |
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Remarks:
The full document is downloadable at: http://www.bis.org/publ/econ46.htm |
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Untitled Document
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Are All Banking Crises Alike? The Japanese Experience in International Comparison
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Author:
Michael Hutchison, Kathleen McDill
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7253 |
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This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. By a host of criteria, Japan appeared to be in a stronger position than most countries at the onset of banking problems low inflation, appreciating currency, balanced government budget, and large external surpluses. However, Japan followed a clear international boom-and-bust pattern in terms of real output growth, credit growth and stock price movements. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. In particular, the likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and 'moral hazard' problem (financial liberalization combined with explicit deposit insurance). The Japanese case is also noteworthy by the long duration of the banking crisis, the length of the coincident recession and general malaise over the economy, the slow regulatory response, and the long delay in the commitment of public funds to re-capitalize the banking sector.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W7253 |
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Untitled Document
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Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises
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Author:
Barry Eichengreen, Andrew K. Rose
Book: NBER working paper |
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Year:
January 1998 Vol: No. W6370 |
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We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors. A one percent increase in Northern interest rates is associated with an increase in the probability of Southern banking crises of around three percent. Our results also seem insensitive to the effects of differing exchange rate regimes, external debt burdens and domestic financial structures.
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/W6370 |
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Untitled Document
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Contagious Currency Crises
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Author:
Barry Eichengreen, Andrew K. Rose, Charles Wyplosz
Book: NBER Working Paper |
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Year:
July 1996 Vol: No. W5681 |
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This paper is concerned with the fact that the incidence of speculative attacks tends to be temporally correlated; that is, currency crises appear to pass contagiously from one country to another. The paper provides a survey of the theoretical literature, and analyzes the contagious nature of currency crises empirically. Using thirty years of panel data from twenty industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries which are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.
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Remarks:
The paper is downloadable at: http://nberws.nber.org/papers/W5681 |
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Untitled Document
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Currency Crises and Foreign Reserves: A Simple Model
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Author:
Piti Disyatat
Book: IMF working paper |
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Year:
Feb 2001 |
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This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crises is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves in then determined endangeously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a crdit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria. |
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Remarks:
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Untitled Document
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Contagion and Trade: Why Are Currency Crises Regional?
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Author:
Reuven Glick, Andrew K. Rose
Book: NBER Working Paper |
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Year:
November 1998 Vol: No. W6806 |
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Currency crises tend to be regional; they affect countries in geographic proximity. This suggests that patterns of international trade are important in understanding how currency crises spread, above and beyond any macroeconomic phenomena. We provide empirical support for this hypothesis. Using data for five different currency crises (in 1971, 1973, 1992, 1994, and 1997) we show that currency crises affect clusters of countries tied together by international trade. By way of contrast, macroeconomic and financial influences are not closely associated with the cross-country incidence of speculative attacks. We also show that trade linkages help explain cross-country correlations in exchange market pressure during crisis episodes, even after controlling for macroeconomic factors.
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Remarks:
Paper in PDF format is downloadable at: http://nberws.nber.org/papers/W6806 |
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Untitled Document
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Fundamentals, Contagion and Currency Crises: An Empirical Analysis
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Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada, Working paper |
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Year:
July 1998 Vol: Working Paper 98-10 |
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This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fundamentals? Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a measure of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion effects as well as the speculative behaviour of investors may be important determinants. |
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Remarks:
The paper in PDF format is downloadable at: http://www.bankofcanada.ca/en/res/wp98-10.htm |
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Untitled Document
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Banking and currency crises: how common are twins?
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Author:
Reuven Glick; Michael Hutchison
Book: Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series |
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Year:
1999 Vol: number 99-07
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The coincidence of banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-97 period. We measure the individual and joint ("twin") occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other. ; We find that the twin crisis phenomenon is most common in financially liberalized emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not old, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises.
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Remarks:
The paper in PDF format is downloadable at: http://ideas.uqam.ca/ideas/data/Papers/fipfedfpb99-07.html |
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Untitled Document
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Currency Crises, Sunspots and Markov-Switching Regimes
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Author:
Paul Masson
Book: Journal of International Economics |
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Year:
January 1999 |
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This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotice dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to that data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.
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Remarks:
Paper in PDF format is downloadable at: http://www.brook.edu/views/papers/masson/20000401.htm |
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Untitled Document
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Currency crises and fixed exchange rates in the 1990s: A review
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Author:
Patrick Osakwe and Lawrence Schembri
Book: Bank of Canada Review article |
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Year:
Autumn 1998 |
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Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.
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Remarks:
The paper is downloadable at: http://www.bankofcanada.ca/en/res/r984b-ea.htm |
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Untitled Document
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Political Contagion in Currency Crises
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Author:
Allan Drazen
Book: NBER Working Paper |
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Year:
July 1999 Vol: No. W7211 |
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Existing models of contagious currency crises are summarized and surveyed, and it is argued that more weight should be put on political factors. Towards this end, the concept of political contagion introduced, whereby contagion in speculative attacks across currencies arises solely because of political objectives of countries. A specific model of membership' contagion is presented. The desire to be part of a political-economic union, where maintaining a fixed exchange rate is a condition for membership and where the value of membership depends positively on who else is a member, is shown to give rise to potential contagion. We then present evidence suggesting that political contagion may have been important in the 1992-3 EMS crisis.
This paper is available in PDF |
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Remarks:
The paper is downloadable at: http://papers.nber.org/papers/w7211 |
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Untitled Document
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Are Currency Crises Predictable? A Test
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Author:
Andrew Berg and Catherine Pattillo
Book: IMF staff paper |
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Year:
June 1999 Vol: Volume 46, Number 2 |
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This paper evaluates three models for predicting currency crises that were proposed before 1997. The idea is to answer the question: if we had been using these models in late 1996, how well armed would we have been to predict the Asian crisis? The results are mixed. Two of the models fail to provide useful forecasts. One model provides forecasts that are somewhat informative though still not reliable. Plausible modifications to this model improve its performance, providing some hope that future models may do better. This exercise suggests, though, that while forecasting models may help indicate vulnerability to crisis, the predictive power of even the best of them may be limited. |
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Remarks:
The paper is downloadable at: http://www.imf.org/external/Pubs/FT/staffp/1999/06-99/berg.htm |
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Untitled Document
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Corporate Leverage and Currency Crises
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Author:
Arturo Bris & Yrjo Koskinen
Book: Scandinavian Working Paper Series in Economics and Finance |
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Year:
March 17, 2000 Vol: No 367 |
| |
This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending a fixed exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues are in a foreign currency and costs are at least partially in domestic. Interestingly, foreign borrowing by exporting firms doesn't change the qualitative results: if firms' debt is denominated in foreign currency, a larger depreciation is needed to restore incentives to invest. An important feature in our model is that in general exporting firms choose to finance investments with debt instead of equity. Currency depreciation is socially optimal if risky projects have a higher expected return than safe projects and if firms are forced to rely on debt financing because of underdeveloped equity markets. Although currency depreciation is always ex-post optimal, it can be harmful ex-ante. Exporting firms know that the government will let the currency depreciate, if their risky investments have failed. This leads to excessive investment in risky projects even if more valuable safe projects are available |
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Remarks:
The paper is downloadable at: http://swopec.hhs.se/hastef/abs/hastef0367.htm |
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Untitled Document
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Fundamentals, Contagion and Currency Crises:
|
| |
Author:
Mark Kruger, Patrick N. Osakwe and Jennifer Page
Book: Bank of Canada Working Paper |
| |
Year:
July 1998 Vol: Bank of Canada Working Paper |
| |
This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fun-damentals?
Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a meas-ure
of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally
not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the
idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion
effects as well as the speculative behaviour of investors may be important determinants. |
| |
Remarks:
The paper is downloadable at: http://collection.nlc-bnc.ca/100/200/301/bankc-wp/1998/98-10/wp98-10.pdf |
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Untitled Document
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Currency and Banking Crises: The Early Warnings of Distress
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| |
Author:
Graciela L. Kaminsky
Book: The Federal Reserve Board International Finance Discussion Papers |
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Year:
1998 |
| |
The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample. |
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Remarks:
http://www.federalreserve.gov/pubs/ifdp/1998/629/default.htm |
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Untitled Document
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Managing Currency Crises in Emerging Markets
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Author:
Michael Dooley and Jeffrey Frankel, Editors
Book: Managing Currency Crises in Emerging Markets |
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Year:
March, 2001 |
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This book collects a number of papers published during the conference which was held March 28-31, 2001. Some of them are downloadable while some are still undergoing update process. |
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Remarks:
http://nber.com/books/mgmtcrises/ |
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Untitled Document
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Leading Indicators of Currency Crises in Emerging Economies
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Author:
O. Burkart
Book: The 20th International Symposium on Forecasting |
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Year:
2000 |
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This study identifies common features of currency crises in 15 emerging countries over the period 1980-1998. By analyzing such features, we build an early-warning system aimed at predicting looming crises in probabilistic terms. This work departs from the existing literature in several ways. First, we use quarterly data, in contrast to other studies, which are based on monthly or annual data. This allows us to characterize crises more accurately and also to analyze the behavior of leading indicators as actual crises approach. Second, the overvaluation of currencies is assessed by using real effective exchange rates, instead of the usual bilateral rates. In addition, capital controls dummies are included in the set of explanatory variables and contagion indicators are constructed. Finally, we use the Fisher linear discriminant analysis technique. The model yields a relatively good - and unbiased - ratio of correct predictions: four out of five crises are predicted correctly and only one out of five non-crises is predicted as a crisis. These results compare favorably to those of other models. For early warning systems, there exists a fundamental trade-off based on the Bayes’ formula in a context of rare events: to a certain extent, one has to choose between a high ratio of good classifications of crises and a low ratio of false alarms. Furthermore, using Bayes’ formula allows us to calculate the posterior probability that a given emerging economy will be in a period of currency crisis within a one-year horizon.
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Paper is obtainable upon request: http://isf2000.deio.fc.ul.pt/absview.asp?AbsID=159 |
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European Currency Crises and After
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Author:
Christian Bordes-Marcilloux (Editor), Eric Girardin (Editor), Jacques Melitz (Editor), Christian Bordes (Editor)
Book: European Currency Crises and After
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Year:
May 1995 Vol: 253 pages |
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Responding to questions raised by the speculative crises of 1992-93, which shook the European Monetary System (EMS) during Europe's worst postwar recession, 11 contributed chapters examine recent theoretical models of exchange rate target zones, exchange rate crises, and central bank credibility. They also examine the empirical evidence of misalignment, the efficiency of central bank intervention by the G3, measures of exchange rate risk under wide official bands, the exchange rate crises in 1992-93, and central bank behavior in the EMS. For students and teachers of international finance, international monetary economics, and monetary policy. |
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Remarks:
It can be ordered via Amazon: http://halljobs.com/finance/359.shtml |
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Does a Thin Foreign-Exchange Market Lead to Destabilizing Capital-Market Speculations in the Asian Crisis Countries?
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Author:
Hong G. Min and Judith A. McDonald
Book: |
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Year:
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This paper investigates how the thinness of foreign-exchange markets causes destabilizing speculations, especially when exchange-rate flexibility is increased as in the Asian crisis countries. In what follows, we analyze the impact of this foreign-exchange market thinness on the dynamic capital mobility and capital-market risk of four Asian crisis countries: Indonesia, Korea, Malaysia, and Thailand. Using the vector-autoregression model, impulse response functions, and variance decomposition, it is shown that in response to one-standard-deviation shock to interest and exchange rates, the dynamic capital mobility of all four crisis countries has decreased in the short run. These
shocks also cause the capital-market risk of these countries to increase.
Since the onset of the crisis, the Asian crisis countries responded by increasing their interest rates and devaluing their currencies. These measures are intended to stem capital
flight from the borrowing countries and to encourage capital inflows. However, in an environment of protracted financial-sector reform and thin foreign-exchange markets, these standard policies did not stabilize the capital inflows into these crisis countries. Our research supports the view that because the standard policies were not able to change institutional investors’ (self-fulfilling) expectations and their herding behavior, the Asian crisis countries’ policies have -- in the short run -- not been successful. This failure is in
large part attributable to the very thin foreign-exchange markets of these Asian countries. |
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The full version of the paper can be downloaded at: http://www.worldbank.org/research/pdffiles/wps2056.pdf |
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Untitled Document
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Causes of the Financial Crisis and the Need of Monetary Cooperation in East Asia
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Author:
Oh, Yong Suk
Book: Global Economic Review |
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Year:
2000 Vol: 29(2), pages 3-23. |
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The Main causes of the East Asian financial crisis in 1997-98 can be divided into domestic and foreign ones. The domestic cause stems from structural and liquidity problems, with growing share of non-performing loans in the financial sector, posing as the most visible manifestation of such problems. On the other side, there is the foreign cause, the sudden fall of the yen against the dollar under the region's unstable foreign exchange system and also its over-dependency on the dollar. Unfortunately, these causes have not yet disappeared. In order to prevent another financial economic crisis from recurring and to secure the regional currency stability in the long run, an external safety device is indispensable. The purpose of the East Asian monetary cooperation device is not only to absorb the external shocks caused by abrupt changes in the dollar/yen rate and sudden flow of capital, but also to settle international liquidity problems among the regional countries. If a device for the East Asian monetary cooperation is established, transparency in both financial and physical markets will be augmented and in the process, so will be the stability of financial and physical transactions.
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