https://www.bancaditalia.it/pubblicazioni/temi-discussione/1998/1998-0343/tema_343_98.pdf

What Caused the Asian Currency and Financial Crisis

In this Paper we assess the progress made by the profession in understanding whether and how exchange rate intervention works. To this end, we review the theory and evidence on official intervention, concentrating primarily on work published within the last decade or so. Our reading of the recent literature leads us to conclude that, in contrast with the profession's consensus view of the 1980s, official intervention can be effective, especially through its role as a signal of policy intentions, and especially when it is publicly announced and concerted. We also note, however, an apparent empirical puzzle concerning the secrecy of much intervention and suggest an additional way in which intervention may be effective but which has so far received little attention in the literature, namely through its role in remedying a coordination failure in the foreign exchange market.

/pdf/official-intervention-in-the-foreign-exchange-market-is-it-55wml8h7u7.pdf

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Much of the current debate on reforming the international financial architecture is aimed at reducing the risks of contagion best defined as a significant increase in cross market linkages after a shock to an individual country (or group of countries). This definition highlights the importance of other links through which shocks are normally transmitted including trade and finance. During times of crisis, the ways in which shocks are transmitted do seem to differ, and these differences appear to be important. Empirical work has helped to identify the types of links and other macroeconomic conditions that can make a country vulnerable to contagion during crisis considerations periods, although less is known about the importance of microeconomic and institutional factors in propagating shocks. Empirical research has helped to identify those countries that are at risk of contagion as well as some, albeit quite general, policy interventions that can reduce risks.

/pdf/contagion-understanding-how-it-spreads-20cuaohxl3.pdf

Contagion: Understanding How It Spreads

Many observers have argued that the regulatory framework in place prior to the global financial crisis was deficient because it was largely "microprudential" in nature. A microprudential approach is one in which regulation is partial equilibrium in its conception and aimed at preventing the costly failure of individual financial institutions. By contrast, a "macroprudential" approach recognizes the importance of general equilibrium effects, and seeks to safeguard the financial system as a whole. In the aftermath of the crisis, there seems to be agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction. In this paper, we offer a detailed vision for how a macroprudential regime might be designed. Our prescriptions follow from a specific theory of how modern financial crises unfold and why both an unregulated financial system, as well as one based on capital rules that only apply to traditional banks, is likely to be fragile. We begin by identifying the key market failures at work: why individual financial firms, acting in their own interests, deviate from what a social planner would have them do. Next, we discuss a number of concrete steps to remedy these market failures. We conclude the paper by comparing our proposals to recent regulatory reforms in the United States and to proposed global banking reforms.

/pdf/a-macroprudential-approach-to-financial-regulation-4gf7fn0dyt.pdf

A Macroprudential Approach to Financial Regulation

Using a recent IMF survey and expanding on previous studies, we document the use of macroprudential policies for 119 countries over the 2000-13 period, covering many instruments. Emerging economies use macroprudential policies most frequently, especially foreign exchange related ones, while advanced countries use borrower-based policies more. Usage is generally associated with lower growth in credit, notably in household credit. Effects are less in financially more developed and open economies, however, and usage comes with greater cross-border borrowing, suggesting some avoidance. And while macroprudential policies can help manage financial cycles, they work less well in busts.

https://papers.ssrn.com/sol3/Delivery.cfm/wp1561.pdf?abstractid=2594144&type=2

The Use and Effectiveness of Macroprudential Policies: New Evidence

https://macrofinance.nipfp.org.in/PDF/JIMFPr_Claessens_NIPFP-DEA-JIMF_Conference_December_2012.pdf

Macro-Prudential Policies to Mitigate Financial System Vulnerabilities

Recent events in East Asia have highlighted the risks of financial structures in a financially integrated world. This paper documents that the buildup of vulnerabiliti es in East Asia was mainly the result of weaknesses in domestic financial intermediation, poor corporate governance, and deficient government policies, including poor macro-economic policy responses to large capital inflows. Weak due diligence by external creditors, in part fueled by ample global liquidity, also played a role in building up vulnerabiliti es, but global factors were more important in triggering the crises than in causing them. In spite of these policies and weaknesses, we argue, however, that for most East Asian countries a large financial crisis was not “inevitable,” but was mainly triggered by spillovers from nearby countries. Differences between countries, both in degree of vulnerability and depth of crisis, support this conclusion. The paper concludes with some lessons for other countries.

Volatility and Contagion in a Financially-Integrated World: Lessons from East Asia's Recent Experience

5. Is There a Curse of Location? Spatial Determinants of Capital Flows to Emerging Markets

Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve’s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.

/pdf/global-liquidity-and-external-bond-issuance-in-emerging-1wiunxpcba.pdf

Global liquidity and external bond issuance in emerging markets and developing economies

Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.

https://www.imf.org/-/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14155.ashx

Swati R. Ghosh

Papers

Macro-Prudential Policies to Mitigate Financial System Vulnerabilities

Volatility and Contagion in a Financially-Integrated World: Lessons from East Asia's Recent Experience

5. Is There a Curse of Location? Spatial Determinants of Capital Flows to Emerging Markets

Global liquidity and external bond issuance in emerging markets and developing economies

Macro-Prudential Policies to Mitigate Financial System Vulnerabilities