Showing papers on "Currency published in 2003"
Posted Content•
TL;DR: In the last few decades exchange rate economics has seen a number of developments, with substantial contributions to both the theory and empirics of exchange rate determination as mentioned in this paper. But, while our understanding of exchange rates has significantly improved, a few challenges and open questions remain in the exchange rate debate, enhanced by events including the launch of the Euro and the large number of recent currency crises.
Abstract: In the last few decades exchange rate economics has seen a number of developments, with substantial contributions to both the theory and empirics of exchange rate determination. Important developments in econometrics and the increasingly large availability of high-quality data have also been responsible for stimulating the large amount of empirical work on exchange rates in this period. Nonetheless, while our understanding of exchange rates has significantly improved, a number of challenges and open questions remain in the exchange rate debate, enhanced by events including the launch of the Euro and the large number of recent currency crises. This volume provides a selective coverage of the literature on exchange rates, focusing on developments from within the last fifteen years. Clear explanations of theories are offered, alongside an appraisal of the literature and suggestions for further research and analysis.
671 citations
TL;DR: In this paper, the authors recommend the inclusion of ideological currency in the psychological contract perspective in order to broaden the range of employee-organization exchanges that the perspective can accommodate, and develop a model that articulates the conditions under which the breach and violation of ideology-infused psychological contracts will likely occur.
Abstract: We recommend the inclusion of “ideological currency” in the psychological contract perspective in order to broaden the range of employee-organization exchanges that the perspective can accommodate. We differentiate ideological currency from other forms of exchange currency and develop a model that articulates the conditions under which the breach and violation of ideology-infused psychological contracts will likely occur. We conclude by considering the opportunities and challenges implied by the inclusion of ideology in the psychological contract.
506 citations
TL;DR: In this paper, the joint movements of exchange rates and U.S. and foreign term structures over short-time windows around macro announcements are studied using a 14-year span of high-frequency data.
489 citations
TL;DR: In this paper, the authors discuss three concepts widely used in this literature: original sin, debt intolerance, and currency mismatches, and analytically distinguish the hypotheses and problems to which these three terms refer.
Abstract: Recent years have seen the development of a large literature on balance sheet factors in emerging-market financial crises. In this paper we discuss three concepts widely used in this literature. Two of them original sin' and debt intolerance' seek to explain the same phenomenon, namely, the volatility of emerging-market economies and the difficulty these countries have in servicing and repaying their debts. The debt-intolerance school traces the problem to institutional weaknesses of emerging-market economies that lead to weak and unreliable policies, while the original-sin school traces the problem instead to the structure of global portfolios and international financial markets. The literature on currency mismatches, in contrast, is concerned with the consequences of these problems and with how they are managed by the macroeconomic and financial authorities. Thus, the hypotheses and problems to which these three terms refer are analytically distinct. The tendency to use them synonymously has been an unnecessary source of confusion.
476 citations
27 Jan 2003
TL;DR: A simple and practical system that provides a high degree of privacy assurance that depends on a careful separation of the privileges offered by optical vs. radio-frequency contact with banknotes and full exploitation of the limited access-control capabilities of RFID tags.
Abstract: Thanks to their broad international acceptance and availability in high denominations, there is widespread concern that Euro banknotes may provide an attractive new currency for criminal transactions. With this in mind, the European Central Bank has proposed to embed small, radio-frequency-emitting identification (RFID) tags in Euro banknotes by 2005 as a tracking mechanism for law enforcement agencies. The ECB has not disclosed technical details regarding its plan. In this paper, we explore some of the risks to individual privacy that RFID tags embedded in currency may pose if improperly deployed. Acknowledging the severe resource constraints of these tags, we propose a simple and practical system that provides a high degree of privacy assurance. Our scheme involves only elementary cryptography. Its effectiveness depends on a careful separation of the privileges offered by optical vs. radio-frequency contact with banknotes, and full exploitation of the limited access-control capabilities of RFID tags.
413 citations
Book•
30 Nov 2003
TL;DR: In this article, the authors present a history, facts and institutions of the European Monetary Union (EMU) and the Eurozone in crisis, as well as a discussion of the economic integration of the EMU.
Abstract: Part 1: History, Facts and Institutions 1. History 2. Facts, Law, Institutions and Budget 3. Decision Making Part II: The Microeconomics of Economic Integration 4. Essential Microeconomics Tools 5. The Essential Economics of Preferential Liberalization 6. Market Size and Scale Effects 7. Growth Effects and Factor Market Integration 8. Economic Integrations, Labour Markets and Migration Part III: EU Micro Policies 9. The Common Agricultural Policy 10. Location Effects, Economic Geography and Regional Policy 11. EU Competition and State Aid Policy 12. EU Trade Policy Part IV: The Macroeconomics of Monetary Integration 13. Essential Macroeconomic Tools 14. Essential Facts of Monetary Integration 15. Optimum Currency Areas Part V: EU Monetary and Fiscal Policies 16. The European Monetary Union 17. Fiscal Policy and the Stability Pact 18. The Financial Markets and the Euro 19. The Eurozone in crisis
390 citations
TL;DR: This article argued that the fear of floating is entirely rational from the perspective of each individual country and their joint pegging to the dollar benefits the East Asian dollar bloc as a whole, although Japan remains an important outlier.
Abstract: Before the crisis of 1997/98, the East Asian economies - except for Japan but including China - pegged their currencies to the US dollar. To avoid further turmoil, the IMF argues that these currencies should float more freely. However, the authors' econometric estimations show that the dollar's predominant weight in East Asian currency baskets has returned to its pre-crisis levels. By 2002, the day-to-day volatility of each country's exchange rate against the dollar had again become negligible. Most governments were rapidly accumulating a 'war chest' of official dollar reserves, which portends that this exchange rate stabilization will come to extend over months or quarters. From the doctrine of 'original sin' applied to emerging-market economies, the authors argue that this fear of floating is entirely rational from the perspective of each individual country. And their joint pegging to the dollar benefits the East Asian dollar bloc as a whole, although Japan remains an important outlier.
291 citations
TL;DR: In this article, the authors show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation, and that more of this insurance is present when external debt is denominated in domestic currency rather than in dollars.
Abstract: We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problem.
262 citations
TL;DR: This paper explored the determinants of a country's capacity to borrow at home at long duration and in local currency and found that monetary credibility and the presence of capital controls are positively correlated with this capacity.
259 citations
Posted Content•
TL;DR: In this article, the authors discuss three concepts widely used in this literature: original sin, debt intolerance, and currency mismatches, and analytically distinguish the hypotheses and problems to which these three terms refer.
Abstract: Recent years have seen the development of a large literature on balance sheet factors in emerging-market financial crises. In this paper we discuss three concepts widely used in this literature. Two of them original sin' and debt intolerance' seek to explain the same phenomenon, namely, the volatility of emerging-market economies and the difficulty these countries have in servicing and repaying their debts. The debt-intolerance school traces the problem to institutional weaknesses of emerging-market economies that lead to weak and unreliable policies, while the original-sin school traces the problem instead to the structure of global portfolios and international financial markets. The literature on currency mismatches, in contrast, is concerned with the consequences of these problems and with how they are managed by the macroeconomic and financial authorities. Thus, the hypotheses and problems to which these three terms refer are analytically distinct. The tendency to use them synonymously has been an unnecessary source of confusion.
240 citations
Patent•
19 Jun 2003TL;DR: In this article, the authors present a system and method for providing a flexible limit subsidiary account that may be issued by a Foreign Financial Institution (foreign financial institution) that allows a parent to provide funds to a subsidiary and to control the spending of subsidiary or spending capacity.
Abstract: The present invention provides a system and method for providing a flexible limit subsidiary account that may be issued by a Foreign Financial Institution. In particular, the present provides a system and method for allowing a parent to provide funds to a subsidiary and to control the spending of subsidiary or spending capacity. The card account may be issued at the request of the parent who may retain the ability to define, modify, and/or terminate the spending and/or debt accumulation limits for the subsidiary card account as well as other features as described in the attached disclosure. The system may be configured to provide the ability for parent to eliminate risks associated with fluctuations in currency exchange rates by committing to fixed automatic long-term charges at a fixed foreign exchange rate for a fixed term.
TL;DR: In this article, the authors examined the performance of momentum trading strategies in foreign exchange markets and found that the performance is not due to a time-varying risk premium but rather depends on the underlying autocorrelation structure of the currency returns.
Abstract: This paper examines the performance of momentum trading strategies in foreign exchange markets. We find the well-documented profitability of momentum strategies during the 1970s and the 1980s has continued throughout the 1990s. Our approach and findings are insensitive to the specification of the trading rule and the base currency for analysis. Finally, we show that the performance is not due to a time-varying risk premium but rather 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.
TL;DR: In this paper, the authors explore one way to extend the New Open Economy Macroeconomics in an empirical direction by using maximum likelihood procedures to estimate and test an intertemporal small open economy model with monetary shocks and nominal rigidities.
TL;DR: This paper examined the determinants of debt issuance in 10 major currencies by large U.S. firms and found strong evidence that firms issue foreign currency debt to hedge their exposure both at the aggregate and the individual currency levels.
Abstract: We examine the determinants of debt issuance in 10 major currencies by large U.S. firms. Using the fraction of foreign subsidiaries and tests exploiting the disaggregated nature of our data, we find strong evidence that firms issue foreign currency debt to hedge their exposure both at the aggregate and the individual currency levels. We also find some evidence that firms choose currencies in which information asymmetry between domestic and foreign investors is low. We find no evidence that tax arbitrage, liquidity of underlying debt markets, or legal regimes influence the decision to issue debt in foreign currency.
TL;DR: In this paper, the authors developed an empirical model of bilateral exchange rate volatility and explored the determinants of BER volatility in a broad cross-section of countries, concluding that external debt tightens financial constraints and reduces the efficiency of the exchange rate in responding to external shocks.
TL;DR: In this article, the implications of uncoordinated borrowing were studied, and the authors revisited the "original sin" debate, analyzing whether and when equity portfolio investment, international portfolio diversification, domestic currency denomination and longer maturities enhance borrowing countries' access to international lending.
Abstract: Studying the implications of uncoordinated borrowing, the paper first looks at whether and when countries borrow too much in the aggregate. It then revisits the "original sin" debate, analyzing whether and when equity portfolio investment, international portfolio diversification, domestic currency denomination and longer maturities enhance borrowing countries' access to international lending. The paper thereby relates a country's level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings, their location, the extent of control rights held by political authorities, and the interests of dominant domestic political forces.
TL;DR: In this article, the authors study the extent to which crashes in emerging market currencies are predictable using simple logit models based on lagged macroeconomic and financial data and calculate trading strategies in which an investor goes long or short in the currency depending on whether crash probabilities are low or high.
28 Nov 2003
TL;DR: In this paper, the authors discuss the relationship between exchange rate policy and the character of the international monetary system and explain why exchange rate regime and level decisions require coordination and often explicit cooperation among national governments.
Abstract: ■ Abstract The structure of international monetary relations has gained increasing prominence over the past two decades. Both national exchange rate policy and the character of the international monetary system require explanation. At the national level, the choice of exchange rate regime and the desired level of the exchange rate involve distributionally relevant tradeoffs. Interest group and partisan pressures, the structure of political institutions, and the electoral incentives of politicians therefore influence exchange rate regime and level decisions. At the international level, the character of the international monetary system depends on strategic interaction among governments, driven by their national concerns and constrained by the international environment. A global or regional fixed-rate currency regime, in particular, requires at least coordination and often explicit cooperation among national governments.
TL;DR: This article showed that spillovers caused by banks' exposures to a crisis country help predict flows in third countries after the Mexican and Asian crises, but not after the Russian crisis, suggesting that countries might reduce contagion risk by diversifying the sources of their financing and by carefully monitoring borrowing from creditors exposed to potential crisis countries.
TL;DR: The authors surveys recent empirical evidence on the determinants of the currency composition of debt, and on the impact of exchange rate fluctuations on economic activity, and suggests that Latin American firms tend to partially match the composition of their debt with the currency compositions of their income stream but the liability dollarization can reduce or possibly reverse the typical Mundell-Fleming result of expansionary devaluations.
TL;DR: In this article, the authors consider how best to reduce the frequency and costs of financial crisis in emerging markets and propose adjustment programs that follow crisis, considering how to design these programs so that they shorten the recovery phase, encourage economic growth, and minimize the probability of future difficulties.
Abstract: How to manage financial crises in emerging markets is a high-stakes and contentious challenge for public policy today. In this book, leading economists -many of whom have also participated in policy debates on these issues - consider how best to reduce the frequency and costs of such crises. The first three chapters focus on the immediate defence of a currency under attack, exploring whether unnecessary damage to economies can be avoided by adopting the right response in the first few days of a financial crisis. Next, contributors examine the adjustment programs that follow crises, considering how to design these programs so that they shorten the recovery phase, encourage economic growth, and minimize the probability of future difficulties. Finally, the last four papers analyze the actual effects of adjustment programs, asking whether they accomplish what they are designed to do and whether they impose disproportionate costs on the poorest members of society. Economists and policymakers should welcome this volume, as they have its companion, Sebastian Edwards and Jeffrey A. Frankel's "Preventing Currency Crises in Emerging Markets".
Posted Content•
TL;DR: In this paper, the authors consider a model where foreign exporting firms sell intermediate goods to domestic firms, and they show that domestic firms prefer to price in domestic currency, while exporting firms tend to prices in the exporter's currency.
Abstract: It is well known that the extent of pass-through of exchange rate changes to consumer prices is much lower than to import prices. One explanation is local distribution costs. Here we consider an alternative, complementary explanation based on the optimal pricing strategies of firms. We consider a model where foreign exporting firms sell intermediate goods to domestic firms. Domestic firms assemble the imported intermediate goods and sell final goods to consumers. When domestic firms face significant competition from other domestic final goods producing sectors (e.g., the non-traded goods sector) we show that they prefer to price in domestic currency, while exporting firms tend to price in the exporter's currency. In that case the pass-through to import prices is complete, while the pass-through to consumer prices is zero.
TL;DR: In this article, the impact of the adoption of the euro on the commercial transactions of EMU countries is investigated, and the main finding is that the adoption has had a positive but not an exorbitant impact on bilateral trade between European countries.
Abstract: In this paper, the impact of the adoption of the euro on the commercial transactions of EMU countries is investigated. It seeks to disentangle the effects of eliminating exchange rate volatility — and those of other policy factors that promote integration — from the influence of the emergence of the European currency union. Since EMU is a relatively new phenomenon, a panel estimation of the gravity equation in a dynamic framework is used in order to capture effects like trade persistence. The main finding is that the adoption of the euro has had a positive but not an exorbitant impact on bilateral trade between European countries (ranging between 9 and 10 per cent). The impact is much lower than that shown in the recent literature on a larger and heterogeneous set of countries. One reason for this divergence seems to be that the euro was adopted after decades of integration policies had already worked through in Europe. JEL no. F4, F15, C230
TL;DR: In this paper, the authors investigate how the elimination of intra-European exchange risk may affect international financial markets using a conditional version of the International CAPM and estimate the EMU and non-EMU components of aggregate currency risk and document significant exposures to both.
Posted Content•
TL;DR: In this paper, the authors explore the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility, and they present a model in which firms choose the currency composition of their debts so as to minimize their probability of default.
Abstract: This Paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency. The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt. The Paper presents some empirical evidence and discusses policy implications.
TL;DR: The authors developed a model of strategic interaction between speculators in currency markets and policymakers in governments, showing that speculative attacks occur when economic fundamentals are weak or when there is uncertainty about the capability and/or willingness of governments to defend the currency peg.
Abstract: Speculative currency attacks are a regular feature of the international political economy. Nevertheless, not all speculative attacks result in a devalued currency. In many cases, politicians were willing and able to defend the exchange rate peg. I develop a model of strategic interaction between speculators in currency markets and policymakers in governments. This model indicates that speculative attacks occur when economic fundamentals are weak or when there is uncertainty about the capability and/or willingness of governments to defend the currency peg. I show that the government’s decision to defend the peg reflects institutional, electoral, and partisan incentives. I test hypotheses from this model on a sample of 90 developing countries between 1985 and 1998 using a strategic probit model.
TL;DR: In this paper, the authors investigated the interlinkages among different markets and different countries within the Asian region using the Granger causality and concluded that the empirical evidence does not find strong support for contagion.
TL;DR: In this article, the role of contagion in currency crises in emerging markets during the 1990s was analyzed using a non-linear Markov-switching model to conduct a systematic comparison and evaluation of three distinct causes of currency crises: contagion, weak economic fundamentals, and sunspots.
Abstract: This paper analyses the role of contagion in the currency crises in emerging markets during the 1990s. It employs a non-linear Markov-switching model to conduct a systematic comparison and evaluation of three distinct causes of currency crises: contagion, weak economic fundamentals, and sunspots, i.e. unobservable shifts in agents' beliefs. Testing this model empirically through Markov-switching and panel data models reveals that contagion, i.e. a high degree of real integration and financial interdependence among countries, is a core explanation for recent emerging market crises. The model has a remarkably good predictive power for the 1997–1998 Asian crisis. The findings suggest that in particular the degree of financial interdependence and also real integration among emerging markets are crucial not only in explaining past crises but also in predicting the transmission of future financial crises. Copyright © 2003 John Wiley & Sons, Ltd.
TL;DR: In this paper, the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates was studied. But the impact of the zero bound on the effectiveness of interest rate policy in Japan in terms of stabilizing output and inflation was not analyzed.
TL;DR: In this article, the authors present a two-sector endogenous growth model in which financial crises can occur, and analyze the relationship between financial fragility and growth, showing that there is a robust empirical link between per-capita GDP growth and negative skewness of credit growth across countries with active financial markets.
Abstract: We address the question of whether growth and welfare can be higher in crisis prone economies. First, we show that there is a robust empirical link between per-capita GDP growth and negative skewness of credit growth across countries with active financial markets. That is, countries that have experienced occasional crises have grown on average faster than countries with smooth credit conditions. We then present a two-sector endogenous growth model in which financial crises can occur, and analyze the relationship between financial fragility and growth. The underlying credit market imperfections generate borrowing constraints, bottlenecks and low growth. We show that under certain conditions endogenous real exchange rate risk arises and firms find it optimal to take on credit risk in the form of currency mismatch. Along such a risky path average growth is higher, but self-fulfilling crises occur occasionally. Furthermore, we establish conditions under which the adoption of credit risk is welfare improving and brings the allocation nearer to the Pareto optimal level. The design of the model is motivated by several features of recent crises: credit risk in the form of foreign currency denominated debt; costly crises that generate firesales and widespread bankruptcies; and asymmetric sectorial responses, where the nontradables sector falls more than the tradables sector in the wake of crises.