Exchange market mayhem

The antecedents and aftermath of speculative attacks

This paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets. Using data from 1959 through 1993 for twenty OECD countries, we consider the antecedents and aftermath of devaluations and revaluations, flotations, fixings and speculative attacks (which may not be successful). We find that realignments of fixed exchange rates are alike: devaluations are preceded by political instability, budget and current account deficits, and fast growth of money and prices. Revaluations are mirror images of devaluations. Speculative attacks resemble devaluations, but money growth and inflation are more endemic and there is no last-minute attempt to tighten monetary policy. In contrast, few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables. Transitions between exchange rate regimes are largely idiosyncratic, and are neither consistently provoked ex ante by systematic imbalances, nor typically justified ex post by subsequent changes in policy. We conclude that there are no clear early warning signals of many speculative attacks, and no easy solutions for policy-makers.

— Barry Eichengreen, Andrew K. Rose and Charles Wyplosz

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Exchange market mayhem: the antecedents and aftermath of speculative attacks

Financial crises Lessons from the last 120 years

The crisis problem is one of the dominant macroeconomic features of our age. Its prominence suggests questions like the following: Are crises growing more frequent? Are they becoming more disruptive? Are economies taking longer to recover? These are fundamentally historical questions, which can be answered only by comparing the present with the past. To this end, this paper develops and analyses a data base spanning 120 years of financial history. We find that crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard periods and is rivalled only by the crisis‐ridden 1920s and 1930s. History thus confirms that there is something different and disturbing about our age. However, there is little evidence that crises have grown longer or output losses have become larger. Crises may have grown more frequent, in other words, but they have not obviously grown more severe. Our explanation for the growing frequency and chronic costs of crises focuses on the combination of capital mobility and the financial safety net, including the implicit insurance against exchange risk provided by an ex ante credible policy of pegging the exchange rate, which encourages banks and corporations to accumulate excessive foreign currency exposures. We also provide policy recommendations for restoring stability and growth.

— Michael Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad Martinez‐Peria

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Is the crisis problem growing more severe

We address 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. We also provide empirical evidence consistent with the contagious nature of currency crises. We estimate that the existence of a currency crisis elsewhere in the world (whether successful or not) raises the probability of an attack on the domestic currency by 8 percent, even after taking account of a variety of domestic political and economic factors.

Contagious Currency Crises: First Tests*

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A Monetary Model of Exchange Market Pressure Applied to the Post-War Canadian Experience

“Monetary and Portfolio-Balance Models of Exchange Rate Determination” was a survey of empirical models of the 1970s, published in Economic Interdependence and Flexible Exchange Rates , edited by J. Bhandari (M.I.T. Press: Cambridge), in 1983. It is here supplemented with a brief epilogue to update the literature to 1987, including some skeptical observations on recent claims that “random walk” results constitute evidence in favor of an “equilibrium” model of the exchange rate.

Monetary and Portfolio-Balance Models of Exchange Rate Determination

Theory and implications of currency substitution

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Theory and Implications of Currency Substitution

In this paper the issues raised in the turn-of-the-century American debate over the quantity theory of money are examined. J. Laurence Laughlin of Chicago,the leading antiquantity theorist, provoked the controversy with theoretical and empirical criticisms of the quantity theory, while Irving Fisher emerged as the chief defender of the monetary orthodoxy. Laughlin argued that issues of convertible paper money would not raise prices or the money supply but would instead lead to losses of monetary gold. His position was regarded as incompatible with the classical neutrality-of-money theorem. To identify the fundamental sources of disagreement between Laughlin and the quantity theorists, the neutrality-of-money proposition is decomposed into two components the neutrality proposition per se and the assumed causal role of money.

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Don E. Roper

Papers

A Monetary Model of Exchange Market Pressure Applied to the Post-War Canadian Experience

Theory and implications of currency substitution

Theory and Implications of Currency Substitution

J. Laurence Laughlin and the Quantity Theory of Money

Modeling the International Influences on the U.S. Economy : A Multi-Country Approach