Showing papers on "Currency published in 2001"

Is the crisis problem growing more severe

Abstract: 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

An Introduction to High-Frequency Finance

Abstract: Liquid markets generate hundreds or thousands of ticks (the minimum change in price a security can have, either up or down) every business day. Data vendors such as Reuters transmit more than 275,000 prices per day for foreign exchange spot rates alone. Thus, high-frequency data can be a fundamental object of study, as traders make decisions by observing high-frequency or tick-by-tick data. Yet most studies published in financial literature deal with low frequency, regularly spaced data. For a variety of reasons, high-frequency data are becoming a way for understanding market microstructure. This book discusses the best mathematical models and tools for dealing with such vast amounts of data. This book provides a framework for the analysis, modeling, and inference of high frequency financial time series. With particular emphasis on foreign exchange markets, as well as currency, interest rate, and bond futures markets, this unified view of high frequency time series methods investigates the price formation process and concludes by reviewing techniques for constructing systematic trading models for financial assets.

National Money as a Barrier to International Trade: The Real Case for Currency Union

Abstract: Europeans are proceeding with Economic and Monetary Union (EMU); a number of countries in the Americas are pursuing dollarization. Why? Conventional wisdom is that the costs are high, since members of currency unions cannot employ domestic monetary policy to smooth business cycles. More intriguingly, most economists think that the economic benefits from currency union are low. We argue below that conventional wisdom may be wrong, since national money seems to be a significant barrier to international trade in the data. Currency unions lower these monetary barriers to trade and are thus associated with higher trade and welfare; we estimate that EMU will cause European trade to rise by over 50 percent. The benefits of trade created by currency union may swamp any costs of forgoing independent monetary policy.

Does a currency union affect trade? the time series evidence

Abstract: Does leaving a currency union reduce international trade? We answer this question using a large annual panel data set covering 217 countries from 1948 through 1997. During this sample a large number of countries left currency unions; they experienced economically and statistically significant declines in bilateral trade, after accounting for other factors. Assuming symmetry, we estimate that a pair of countries that starts to use a common currency experiences a near doubling in bilateral trade.

A Model of Financial Crises in Emerging Markets

Abstract: Recent events in Mexico, Asia, Russia, and Brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive. Not too long ago, the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates. But this first generation view, pioneered by Krugman [1979], has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent. And, as Obstfeld [1994] has argued, currency crises have sometimes occurred even though central banks had more than enough resources to prevent them: witness much of Europe in the early 1990s. Obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large. This new perspective implied that crises could be driven by self-fulfilling expectations, since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained. But Obstfeld’s emphasis on mounting unemployment and domestic recession, while appropriate for the ERM 1992 crisis, was at odds with the facts in Mexico in 1994 and East Asia in 1997. Asian

Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier

Abstract: In March 1999, a small number of Californians discovered a new world called Norrath, populated by an exotic but industrious people. About 12,000 people call this place their permanent home, although some 60,000 are present there at any given time. The nominal hourly wage is about USD 3.42 per hour, and the labors of the people produce a GNP per capita somewhere between that of Russia and Bulgaria. A unit of Norrath's currency is traded on exchange markets at USD 0.0107, higher than the Yen and the Lira. The economy is characterized by extreme inequality, yet life there is quite attractive to many. The population is growing rapidly, swollen each each day by hundreds of emigres from various places around the globe, but especially the United States. Perhaps the most interesting thing about the new world is its location. Norrath is a virtual world that exists entirely on 40 computers in San Diego. Unlike many internet ventures, virtual worlds are making money -- with annual revenues expected to top USD 1.5 billion by 2004 -- and if network effects are as powerful here as they have been with other internet innovations, virtual worlds may soon become the primary venue for all online activity.

Currency unions and trade: how large is the treatment effect?

Abstract: Currency unions and trade What can the data say? The impact of a common currency on trade can be grossly mismeasured if countries that belong to currency unions are systematically different from those that do not, and if the relationship between trade and its observable determinants is complex. I argue that such complications are plausible and likely to distort the empirical results of a recent Economic Policy paper by Andrew Rose (Issue 30, 2000: pp. 7–45). Using techniques designed to be robust in this situation, I find that the effects of common currency on international trade are considerably less dramatic and much less precisely estimated. — Torsten persson I have always maintained that the measured effect of a single currency on trade appears implausibly large, but I am not convinced by Torsten Persson’s diagnosis and proposed solution. I apply a variety of estimation techniques to a new larger data set, where many more instances of currency union creation and abandonment make it possible to rely on time–series as well as cross–sectional evidence. The results are similar to my earlier ones: the effect of a single currency on trade is large. — Andrew Rose

Currency crises and monetary policy in an economy withcredit constraints

Abstract: This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic )rms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a ‘currency crisis’ equilibrium withlow output and a depreciated domestic currency, results from the following mechanism: If nominal prices are ‘sticky’, a currency depreciation leads to an increase in the foreign currency debt repayment obligations of )rms, and thus to a fall in their pro)ts; this reduces )rms’ borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, )scal, or expectational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under )xed and 5exible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private )rms. c � 2001

Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier

Abstract: In March 1999, a small number of Californians discovered a new world called "Norrath", populated by an exotic but industrious people. About 12,000 people call this place their permanent home, although some 60,000 are present there at any given time. The nominal hourly wage is about USD 3.42 per hour, and the labors of the people produce a GNP per capita somewhere between that of Russia and Bulgaria. A unit of Norrath's currency is traded on exchange markets at USD 0.0107, higher than the Yen and the Lira. The economy is characterized by extreme inequality, yet life there is quite attractive to many. The population is growing rapidly, swollen each each day by hundreds of imigris from various places around the globe, but especially the United States. Perhaps the most interesting thing about the new world is its location. Norrath is a virtual world that exists entirely on 40 computers in San Diego. Unlike many internet ventures, virtual worlds are making money -- with annual revenues expected to top USD 1.5 billion by 2004 -- and if network effects are as powerful here as they have been with other internet innovations, virtual worlds may soon become the primary venue for all online activity.

A Corporate Balance Sheet Approach to Currency Crises

Abstract: This Paper presents a general equilibrium currency crisis model of the 'third generation', in which the possibility of currency crises is driven by the interplay between private firms' credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features: i) ex post deviations from purchasing power parity; ii) credit constraints a la Bernanke-Gertler; iii) foreign currency borrowing by domestic firms; iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We first show that with a positive likelihood of a currency crisis, firms may indeed find it optimal to borrow in foreign currency, following Chamon (2001). Second, we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. Third, we show that a reduction in the monetary base through restrictive open market operations is more likely to eliminate the possibility of currency crises if at the same time the central bank does not impose excessive constraints on short-term lending facilities.

Does the Current Account Matter

Abstract: The purpose of this paper is to investigate in detail the behavior of the current account in emerging economies, and in particular its role if any in financial crises. Models of current account behavior are reviewed, and a dynamic model of current account sustainability is developed. The empirical analysis is based on a massive data set that covers over 120 countries during more than 25 years. Important controversies related to the current account including the extent to which current account deficits help predict currency crises are also analyzed. Throughout the paper I am interested in analyzing whether there is evidence supporting the idea that there are costs involved in running 'very large' deficits. Moreover, I investigate the nature of these potential costs, including whether they are particularly high in the presence of other type of imbalances.

Do Momentum Based Strategies Still Work in Foreign Currency Markets

Abstract: This paper examines the performance of momentum trading strategies in foreign exchange markets. We find the well-documented profitability of momentum strategies with equities to hold for currencies as well and to have continued throughout the 1980s and the 1990s. Our results indicate that the long/short strategy of buying the most attractive currency and shorting the least attractive currency obtains average excess returns that are significantly positive. Of particular note, the profitability to momentum strategies in foreign exchange markets has been particularly strong during the latter half of the 1990s. By examining 354 long/short moving average rules across eight currencies, we show the results are insensitive to the specification of the trading rule and the base currency for analysis. We also show that the correlations of the long/short momentum strategies using differing base currencies are very high - typically around 0.90. This would indicate that strong/weak momentum currencies relative to a base currency at a particular time are typically also strong/weak currencies relative to most other base currencies as well. Finally, using a bootstrap methodology we show that the performance is not due to a time-varying risk premium but depends on the underlying autocorrelation structure of the currency returns. In sum, the results lend further support to prior momentum studies on equities. The profitability to momentum-based strategies holds for currencies as well.

Exchange-Rate Strategies in the Competition for Attracting Foreign Direct Investment☆

Abstract: Building on the needs for long-term capital inflows in developing countries, this paper reconsiders the choice of an exchange-rate regime by integrating the determinants of multinational firms' locations. The trade-off between price competitiveness and a stable nominal exchange rate is modeled. Empirical results show that exchange-rate volatility is detrimental to foreign direct investment (FDI) and that its impact compares with that of misalignments. One policy implication is that the building of currency blocks could be a way of increasing FDI to emerging countries as a whole. The frontiers of monetary areas would then be strongly influenced by geography, as FDI is. J. Japan. Int. Econ., June 2001, 15(2), pp. 178–198. University of Paris X-Nanterre (THEMA) and CEPII, 200 avenue de la Republique F-92000 Nanterre, France, CEPII and TEAM, 9 rue Georges Pitard F-75015 Paris, France, (University of Amiens (CRIISEA), CEPII and TEAM, 9 rue Georges Pitard F-75015 Paris, France). Copyright 2001 Academic Press. Journal of Economic Literature Classification Numbers: F21, F23, F31, F33.

The National Market Impact of Sovereign Rating Changes

Abstract: This study investigates the aggregate stock market impact of local currency and foreign currency sovereign rating changes. Consistent with evidence pertaining to company credit rating changes, we report that only rating downgrades have a wealth impact on market returns. Decreases in local currency ratings appear to impart no information to the market whereas foreign currency rating downgrades are associated with significant wealth effects. Interestingly, of the four credit rating agencies examined, only Standard & Poors and Fitch rating downgrades result in significant market falls. These results are robust to differences in the currency denomination or interval of returns. Finally, we can find no evidence that emerging markets are particularly sensitive to rating changes or that markets react more severely to multiple rating changes. These findings should be of great interest to all investor groups (including managed investment funds) since there are important implications here regarding international asset allocation.

Fewer Monies, Better Monies

Abstract: In the aftermath of emerging market crises from Russia to Asia and Latin America, there is a quest for better monetary arrangements that are more crisis-proof. Fixed rates are out, flexible rates are in with a policy focus on inflation targeting. But there is, of course, the alternative of abolishing exchange rates all together. This paper revisits the issue of dollarization or currency boards to review what arguments in the debate stand up. The case for flexible exchange rates emphasizes the need for a tool to accomplish relative price adjustment. This paper argues that in an intertemporal perspective most shocks require financing in the capital market rather than adjustment. Moreover, countries frequently do not use their flexible rate to play a cyclical role and, as a result, only a pay a premium for the option to depreciate but do not take advantage of the flexibility; on the contrary, they engineer systematic overvaluation in the context of inflation targeting.

Currency unions and trade: the effect is large

Abstract: The impact of a common currency on trade can be grossly mismeasured if countries that belong to currency unions are systematically different from those that do not, and if the relationship between trade and its observable determinants is complex. I argue that such complications are plausible and likely to distort the empirical results of a recent Economic Policy paper by Andrew Rose (Issue 30, 2000: pp. 7-45). Using techniques designed to be robust in this situation, I find that the effects of common currency on international trade are considerably less dramatic and much less precisely estimated. Copyright CEPR, CES, MSH, 2001.

Toward a comparative institutional analysis

Abstract: Markets are one of the most salient institutions produced by humans, and economists have traditionally analyzed the workings of the market mechanism. Recently, however, economists and others have begun to appreciate the many institution-related events and phenomena that have a significant impact on economic performance. Examples include the demise of the communist states, the emergence of Silicon Valley and e-commerce, the European currency unification, and the East Asian financial crises. In this book Masahiko Aoki uses modern game theory to develop a conceptual and analytical framework for understanding issues related to economic institutions. The wide-ranging discussion considers how institutions evolve, why their overall arrangements are robust and diverse across economies, and why they do or do not change in response to environmental factors such as technological progress, global market integration, and demographic change.

Universal transaction manager agent, systems and methods

Abstract: The present invention relates generally to systems and methods for providing transaction control for purchasing decisions that involve the use of credits, debits, loyalty points, affinity points, promotions, or currency transfers. The present invention provides a common forum where merchants desiring to target consumers prior to or at the time of purchase are matched with customers who desire information, goods, or services related to the merchant. In general, the matching and coordinating of the credit accounts, debit accounts, loyalty (points) programs, affinity (points) programs, promotions, and currency exchanges are performed such that consumers and businesses may obtain the greatest financial, promotional, or desired benefit on purchases of goods and services. Further, merchants may present promotional opportunities to consumers or businesses prior to, at the time of or after transacting the payment of goods or services.

International Trade and Currency Exchange

Abstract: On the international scene, away from national legal rules, the use of different currencies is largely due to the operation of the "Invisible Hand". The paper develops a three-country model of the world economy. This links real trade patterns with currency exchange structures in a general equilibrium framework which includes transaction costs on foreign exchange markets. In the presence of strategic complementarities, there are multiple equilibrium structures of currency exchange for a given underlying real trade pattern. The existence conditions of these different equilibria are characterized, using the trade links between countries as the key parameters. Finally, repercussions on world output of the choice of a currency exchange structure are analysed.

Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America

Abstract: The paper reviews the main challenges faced by policymakers in emerging market economies, EM, in light of recent financial crises, and taking into account salient factors like the existence of partial dollarization, imperfect credibility, weak financial systems, and contagion. The standard theory of optimal currency areas is discussed and criticized for omitting the above factors. When these factors are taken into account, an extreme foreign exchange regime like dollarization is shown to become much more attractive. The paper discusses the pros and cons of dollarization and, among other things, shows that the lack of a lender of last resort is not necessarily a major drawback in EM. The paper also discusses inflation targeting, IT. In a formal model, it is shown that IT could be subject to credibility problems similar to those found in exchange rate-based stabilization programs.

The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity

Abstract: We investigate the implications of the choice of numeraire currency on panel tests of Purchasing Power Parity under the current regime of flexible exchange rates by conducting panel unit root tests with twenty-one different base currencies. We show that the conditions necessary for numeraire irrelevancy are not supported empirically, and that the choice of numeraire currency can and does matter for PPP. The evidence of PPP is stronger for European than for non-European base currencies. Distance between the countries and volatility of the exchange rates are the most important determinants of the results.

How Do Countries Choose Their Exchange Rate Regime

Abstract: This paper investigates the determinants of exchange rate regime choice in 93 countries during 1990-98. Cross-country analysis of variations in international reserves and nominal exchange rates shows that (i) truly fixed pegs and independent floats differ significantly from other regimes and (ii) significant discrepancies exist between de jure and de facto flexibility. Regression results highlight the influence of political factors (political instability and government temptation to inflate), adequacy of reserves, dollarization (currency substitution), exchange rate risk exposure, and some traditional optimal currency area criteria, in particular capital mobility, on exchange rate regime selection.

Borders, Trade and Welfare

Abstract: International economic integration yields large potential welfare effects, even in a static constant returns competitive world economy. Our method is novel. The effect of border barriers on trade flows is often inferred from gravity models. But their rather atheoretic structure precludes welfare analysis. Computable general equilibrium models are designed for tight welfare analysis, but lack econometric foundation. Our method combines these approaches. Gravity models based on Anderson's (1979) interpretation are full general equilibrium models of a special simple sort. In Anderson and van Wincoop (NBER WP 8079, 2001) we develop and estimate this structure, then calculate the comparative static effects on trade flows of border barriers. In this paper we further deploy the model to explore the comparative statics of welfare with respect to borders, to currency unions and to NAFTA. Our NAFTA exercise does a much better job of replicating the actual trade flow changes than do computable general equilibrium models. An interesting implication is that terms of trade changes are very important, even for small' countries such as Mexico.

Currency traders and exchange rate dynamics: A survey of the U

Abstract: We report findings from a survey of United States foreign exchange traders. Our results indicate that: (i) in recent years electronically-brokered transactions have risen substantially, mostly at the expense of traditional brokers; (ii) the market norm is an important det e rminant of interbank bid-ask spread and the most widely-cited reason for deviating from the conventional bid-ask spread is a thin/hectic market; (iii) half or more of market respondents believe that large players dominate in the dollar-pound and dollar-Swiss franc markets; (iv) technical trading best characterizes about 30% of traders, with this proportion rising from five years ago; (v) news about macroeconomic variables is rapidly incorporated into exchange rates; (vi) the importance of individual macroe c onomic variables shifts over time, although interest rates always appear to be important; (vii) economic fundamentals are perceived to be more important at longer horizons, while short-run deviations from the fundamentals are attributed to excess speculation and institutional customer/hedge fund manipulation; (viii) speculation is generally viewed positively, as enhancing market efficiency and liquidity, even though it exacerbates volatility; (ix) central bank intervention does not appear to have substantial effect, although there is general agreement that it increases volatility, and finally; (x) traders do not view purchasing power parity as a useful concept, even though a significant proportion (40%) believe that it affects exchange rates at horizons of over six months.

Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises

Abstract: Crony capitalism and self-fulfilling expectations by international creditors are often suggested as two rival explanations for currency crisis. This paper examines a possible linkage between the two that has not been explored much in the literature: corruption may affect a country's composition of capital inflows in a way that makes it more likely to experience a currency crisis that is triggered/aided by a sudden reversal of international capital flows. We find robust evidence that poor public governance is associated with a higher loan-to-FDI ratio. Such a composition of capital flows has been identified as being associated with a higher incidence of a currency crisis. We also find some weaker evidence that poor public governance is associated with a country's inability to borrow internationally in its own currency. The latter is also associated with a higher incidence of a currency crisis. To sum up, even though crony capitalism does not forecast the timing of a crisis, it can nevertheless increase its likelihood. This paper illustrates a particular channel through which this can happen.

Efficiency Barriers to the Consolidation of the European Financial Services Industry

Abstract: Cross-border consolidation of financial institutions within Europe has been relatively limited, possibly reflecting efficiency barriers to operating across borders, including distance; differences in language, culture, currency, and regulatory/supervisory structures; and explicit or implicit rules against foreign competitors. EU policies such as the Single Market Programme and European Monetary Union attenuate some but not all of these barriers. The evidence is consistent with the hypothesis that these barriers offset most of any potential efficiency gains from cross-border consolidation. Banks headquartered in other EU nations have slightly lower average measured efficiency than domestic banks and non-EU-based foreign banks.