Showing papers on "Foreign-exchange reserves published in 1996"

Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations

Abstract: This conference is one sign of increased interest in collective or cooperative exchange rate arrangements for East Asian countries. A more concrete indication is the announcement in November 1995 by the Hong Kong Monetary Authority and the central banks of Malaysia, Indonesia and Thailand of repurchase agreements designed to provide one another with exchange market support.2 In February of this year Hong Kong and Singapore agreed to intervene for the account of the Bank of Japan to help the latter manage the dollar/yen rate. In March the Bank of Japan joined the network of repurchase arrangements (as had Singapore and the Philippines sometime earlier). Against this background it is not surprising that the apostles of European monetary integration have chosen this time to bring their message to Asia

The Economic Content of Indicators of Developing Country Creditworthiness

Abstract: This paper analyzes the economic determinants of developing country creditworthiness indicators for over 60 developing countries for the period from 1980 to 1993. Our results indicate that economic fundamentals--the ratio of non-gold foreign exchange reserves to imports, the ratio of the current account balance to GDP, growth, and inflation explain a large amount of the variation in the credit ratings. All developing country ratings were adversely affected by an increase in international interest rates independently of the domestic economic fundamentals. A country`s regional location and the structure of its exports (such as whether it is primarily an exporter of fuel products or manufactured products) were also important.

The Economic Content of Indicators of Developing Country Creditworthiness

Abstract: This paper analyzes the economic determinants of developing country creditworthiness indicators for over 60 developing countries for the period from 1980 to 1993. Our results indicate that economic fundamentals – the ratio of nongold foreign exchange reserves to imports, the ratio of the current account balance to GDP, growth, and inflation – explain a large amount of the variation in the credit ratings. All developing country ratings were adversely affected by increases in international interest rates, independent of the domestic economic fundamentals. A country's regional location and the structure of its exports (such as whether it is primarily an exporter of fuel products or manufactured products) were also important.

Macroeconomic adjustment to capital inflows : lessons from recent Latin American and East Asian experience

Abstract: Capital inflows to some developing countries have increased sharply in recent years. Impelled by better economic prospects in those countries, lower international interest rates, and a slowdown of economic activity in the capital exporting countries, the inflows have furnished financing much needed to increase the use of existing capacity and to stimulate investment. But capital inflows can bring with them their own problems. Typical macroeconomic repercussions have been appreciation of the real exchange rate, expansion of non-tradable at the expense of tradable, larger trade deficits, and, in regimes with a fixed exchange rate, higher inflation and an accumulation of foreign reserves. Should government intervene to limit some of these side effects- and if so, how? The question is especially pressing in the wake of the Mexican crisis of December 1994. This article looks for answers in the experience of four Latin American and five East Asian countries between 1986 and 1993, examining the effects of the capital inflows on the economy and comparing the different ways in which these countries responded to the problem of too much capital.

The Future of Central Banking.

Abstract: This volume contains two major papers prepared for the Bank of England's Tercentenary Symposium in June 1994. The first, by Forrest Capie, Charles Goodhart and Norbert Schnadt, provides an authoritative account of the evolution of central banking. It traces the development of both the monetary and financial stability concerns of central banks, and includes individual sections on the evolution and constitutional positions of 31 central banks from around the world. The second paper, by Stanley Fischer, explores the major policy dilemmas now facing central bankers: the extent to which there is a short-term trade-off between inflation and growth; the choice of inflation targets; and the choice of operating procedures. Important contributions by leading central bankers from around the world, and the related Per Jacobsen lecture by Alexander Lamfalussy, are also included in the volume.

On the SDR: Reserve Currencies and the Future of the International Monetary System

Abstract: Thus, neither the total supply nor the total demand for reserves is likely to change dramatically. There is no compelling argument for an SDR allocation to avert a pending global liquidity shortage or to remove an intrinsic instability in the reserve-supply process. There is a consistent argument for an SDR allocation to provide the resources needed to manage national financial crises with international implications--but there are more direct and desirable means of underwriting the relevant facility. European monetary unification, if and when it occurs, will have major implications for the demand and supply of reserves, but there is little reason to think that they will create a significant excess demand for international reserves or destabilize the reserve-supply process. In a future world with a single world currency or three relatively self-contained currency blocs floating against one another, the demand for international reserves would decline or disappear. While there would be a role for the SDR or an instrument like it if the IMF is the world central bank that issues the single world currency, any such scenario is exceedingly remote.

Social Dimension of Adjustment: World Bank Experience, 1980-93

Abstract: This comprehensive study by the Bank's independent Operations Evaluation Department looks at all the evaluated adjustment operations supported by the Bank in 1980-93 (114 operations in 53 countries) and tracks what happened to poverty and income distribution. The findings dispel some popular myths about adjustment lending: 1) two-thirds of the 53 countries implemented the adjustment policies agreed with the Bank with a substantial measure of success. They reduced price distortions and inflation, stabilized their foreign exchange reserves, and achieved growth in income per head; 2) countries that successfully implemented adjustment reduced poverty; and 3) successful adjusters maintained or increased their social spending. The principal message of the study is that good macroeconomic policies and measures - combined with relevant sectoral policies and appropriate public expenditure allocation - provide a favorable environment for accelerating savings and investment, both necessary for sustained economic growth and poverty reduction. In all the cases studied, growth and poverty reduction have been closely related. Finally, the study confirms previous OED findings regarding borrower ownership: the most common reason why adjustment efforts fail is poor government commitment. Thus, the Bank should lend for adjustment only where governments are committed to reforms and likely to sustain them.

Speculative attacks and currency crises: The Mexican experience

Abstract: By using data from the Mexican economy, this paper estimates a speculative attack model of currency crises in order to identify the role of macroeconomic fundamentals and early warning signals of a potential currency crisis. A deterioration in fundamentals appears to generate high onestep-ahead probabilities for the observed regime changes during the sample period 1982-1994. Particularly, foreign reserve losses, expansionary output, monetary and fiscal policies, an increase in inflation differentials and the share of short-term foreign currency-indexed debt, and an appreciation of the real exchange rate appear to have contributed to the speculative pressures and the associated regime changes.

The dollar as an official reserve currency under EMU

Abstract: This article analyzes official reserve-holding behavior in EU countries to assess the effect EMU might have on holdings of dollar reserves. Based on earlier research and new estimates, a wide range of projections is presented for the effect of EMU on the overall demand for reserves and their currency composition. It is argued that official dollar holdings could decline on the order of 35% or more from current dollar holdings, although the range of uncertainty is quite large. The contributions of country-specific factors appear to swamp the systematic components that had been isolated in earlier research.

Realignment expectations in the ERM : Causes and measurement

Abstract: The purpose of this study is to analyze realignment expectations in the exchange rate mechanism of the European Monetary System (EMS), in particular with reference to the five year period (1987-1992) during which no realignments were done.The period chosen for this study provides us an interesting sample in this respect, because, in mid-1990, the EMS faced a historical asymmetric shock of German Monetary Unification (GMU).Dramatic changes in the fundamentals of the anchor country of the system can help us to detect channels through which macroeconomic developments affect the pressure to realign and, therefore, expectations of such realignments. By using a model that breaks the interest rate differential in two components, the expected rate of depreciation within the allowed fluctuation band and the expected rate of depreciation of the central parity rate, we get a measure for the credibility of the exchange rate.We estimate the expected rate of depreciation of the exchange rate within the band, subtract the results from the interest rate differential and obtain values for the expected rate of devaluation.Finally, the estimated values for the expected rate of devaluation are regressed on selected macroeconomic variables in order to find out to which extent the expected rate of devaluation depends on economic fundamentals.The model was built by including the commonly most important factors for exchange rate determination. We observed increased exchange rate credibility in the form of decreasing devaluation expectations over the period 1987-1992.The explanation for this increase in the stability of the EMS is that German interest rates and inflation, were moving upwards and hence, approaching the corresponding variables of the other EMS countries. It was the convergence of these variables that eased the pressure on the nominal exchange rates.Therefore, signs of the 1992 crisis could not be seen in advance in expectations. Our results emphasize the role of the relative cyclical positions of the pegging countries vis-a-vis the anchor country of the system.Thus, expectations of possible realignments as a means of adjustment became actual first after it could be seen that there was a discrepancy between the cyclical needs of the economies in the other EMS countries and the high interest rates imposed on the ERM by Germany.These discrepancies became visible first in the traditional weak-currency countries that faced the most difficult domestic economic situation.This is mirrored by the fact that for these countries the government deficit, relative to Germany, clearly affected devaluation expectations.The divergence of the business cycles added to this effect.The level of foreign exchange reserves of the central bank was observed by the markets, which indicates the praneness of these currencies to get under a speculative attack.In the hard-currency countries, by contrast, devaluation expectations could not be seen even in the very eve of the crisis.For these countries, we obtained the inverse result that a growing government domestic deficit as compared to Germany tends to strengthen the currency of the home country.Markets also seem to observe the inflation rate differential.For the crisis, however, this factor could not play a crucial role because the inflation rates of the hard-currency countries were practically at the German inflation rate level.All in all, the results of this study suggest that the crisis was due to the reversal in the German business cycle in a situation where the anchor country conducted a strict monetary policy to fight domestic inflation pressures. Keywords: Exchange Rate Mechanism, target zone, devaluation expectations, exchange rates, German Monetary Unification

China's emergence : prospects, opportunities, and challenges

Abstract: The authors examine how the economic interactions between rapidly emerging China and the rest of the world may evolve over the coming two decades. They discuss China's growth potential, drawing a parallel between China's rise and the historical rise of Britain, Japan and the United States. Barring major disruptions, they contend, China could become one of the world's largest economies, if not the largest, by the year 2020. Industrial countries, especially Japan and the US , are expected to benefit because their trade structure complements China's. Developing countries, especially exporters of labor-intensive manufactured products, are likely to be put under competitive pressure. The authors argue that it would be advantageous for China to embark on the traditional strategy of a follower country -- that is, to run current account deficits and use foreign resources to supplement domestic investment. Should foreign direct investment continue at its recent rate, China may have to cope with overfinancing of its current account deficits. The authors argue for a development strategy that projects a sustainable growth rate with somewhat higher current account deficits and, therefore, somewhat higher levels of consumption and lower domestic savings, and a toning down of a policy bias that favors coastal regions. Such a strategy would lift consumption standards more rapidly. It would also defuse some of the social tensions generated by the unequal development of different regions. As for the country's vulnerability to the external environment, the authors argue that in the long run China is resilient in the face of adverse external developments, especially those coming from outside Asia. In the short term, however, adverse external shocks could threaten the macroeconomic stability important to reform. A simulation analysis of China's loss of most-favored-nation status in the US confirms this assertion. The authors conclude that preserving openness is in China's best interest and that the US in particular stands to gain much in the longer run if it maintains open trade relations with China. Adversarial US policies could encourage China, Japan and other Asian countries to prefer intraregional trade, possibly excluding the US from full participation in what is bound to be the world's most dynamic growth pole.

The rise and Perpetuation of a Moderate Inflation, Colombia 1970-1991

Abstract: Colombian inflationary experience is explained using a theoretical model that stresses two elements: the effect of shocks and the type of policy designed to respond to them. The empirical investigation uses the event-study methodology and finds that the model successfully accounts for the main characteristics of the country's inflationary process; foreign exchange reserves, agricultural and policy shocks, as well as lack of commitment to low infaltion by the authorities are the main causes behind the sustained high/moderate level of inflation. As assessment of the costs of inflation and price variability, widely documented for other countries, is not found during the periods of high but stable inflation in Colombia.

The Central Bank and Monetary Policy

Abstract: The origin and use of the term “central bank” dates back, in academic literature (Wicksell, Keynes), to the early 1900s. However, the use of the term by dealers, politicians and in legislation is much more recent. A central bank is defined as the “bank of banks”, the “Treasury bank” and finally as the “bank for the economy’s external sector”, i.e., the institution charged with looking after a country’s foreign currency reserves.

Liquidity, risk, and the collapse of the Mexican peso: A dynamic CGE interpretation

Abstract: On December 19th, 1994, Mexico's central bank announced a "one-time" 13% devaluation of the narrow band within which the peso had been allowed to float. Investors reacted violently, and within 48 hours the attack on reserves forced Mexico to abandon exchange rate management entirely.! The free-floating peso began a slide leaving it 33% lower relative to the dollar by the new year, and 50% lower by the middle of February. This paper argues that the Bank of Mexico's December 19th regime change revealed new information to the market, rationalizing the subsequent attack on reserves.2 Specifically, the regime change announcement contained "news" regarding Mexico's stock of official foreign reserves. Insights borrowed from option pricing theory illustrate that such news leads investors to raise the risk premium assigned to peso-denominated loans. The general equilibrium implications of such a shock are shown to include a sharp and immediate devaluation. The shock is simulated using a multi-sector dynamic computable general equilibrium model of Mexico. Following the devaluation, the model predicts a gradual real revaluation extending over several years. In the short-run, resources shift into export and import-competing sectors (principally Mining and Manufacturing), while the current account moves into surplus and net foreign indebtedness is reduced. In the mediumto long-term, the short-run impact is reversed: non-traded goods production expands and export and import competing sectors contract, leaving Mexico with a smaller volume of outstanding debt and of international trade than would have been the case absent the shock.

Mexico's balance-of-payments crisis: a chronicle of death foretold

Abstract: This paper claims that the roots of Mexico's balance-of-payments crisis are found in the prevailing high degree of capital mobility and financial globalization. Under these circumstances, shifts in foreign capital flows and anticipation of a banking-system bailout may produce large imbalances between stocks of financial assets and foreign reserves, threatening the sustainability of currency pegs. Econometric analysis suggests that 1/2 of Mexico's reserve losses could be accounted for by these phenomena. Large financial imbalances are also fertile ground for self-fulfilling-prophesy crises which lead devaluations to produce deep recessions. These difficulties can be partly remedied by appropriate policies.

The lender of last resort function under a currency board: The case of Argentina

Abstract: Within the current rules of the game, Argentina's central bank (BCRA) is charged with being the lender of last resort as well as providing full convertibility between pesos and U.S. dollars - two objectives with one instrument, namely, reserves. Within those rules, it may be well that the balance of responsibilities needs to shift. Complete dollarization can significantly reduce risks but not entirely eliminate them. If the BCRA can concentrate more on building up reserves and helping to ward off crises of confidence in the currency, perhaps the banking system can protect itself better from liquidity shocks. But this will require, among other things, consolidation of the sector (which could give it greater access to outside liquidity) and prudential strengthening of the system. Triage of weaker banks should continue and not await another crisis. More experience with the new liquidity policy is needed and so is reform of the settlement system, as it affects the functioning of the interbank market, which is essential for containing crises. Essentially, however, no grand solution seems to exist for the problems that seem inevitable in a system where the central bank is also the currency board. Argentina's strategy must therefore turn on actively strengthening its banking systems to reduce the risks of insolvency.

Learning from Singapore: Road to Non-Agonised Budgeting

Abstract: For many countries, budgeting has become a tortuous experience. Balancing an increasingly unbalancable budget has become the main preoccupation. Should budgeting be such a dismal exercise? Is there a happier scenario which can serve as a model for these countries? Singapore is an oasis in budgeting. It has continued annually to enjoy a budget surplus, to accumulate official foreign reserves, and to receive a high investment income. Using mainly statistical data, this article seeks to provide explanations for Singapore's success in this respect. The article ends with a suggestion for an international conference on budgeting to be held in Singapore so that the international community can study and analyse Singapore's achievement in budgeting and public finance for the purpose of benefitting from its experience.

Monetary and Exchange Rate Policy in Lithuania

Abstract: The paper describes Lithuanian monetary and exchange rate developments. Experiences of the other two Baltic states Estonia and Latvia have been analysed as well. New monetary and financial institutions introduced in all Baltic states faced several problems. One was how to maintain the credibility for new fixed exchange rates in order to preserve positive effect on the economy due to the sharp fall of the inflation. The currency board system has been proposed as a reasonable solution. Central Banks of Estonia and Lithuania are operating under the currency board arrangement. The main objective was to keep monetary expansion and inflation under control. Lithuania undertook several currency reforms. After two year experience of the floating exchange rate, the Lithuanian Government pegged Lithuanian currency to the US dollar in April 1994. From that moment the Lithuanian Central bank has been operating like strict currency board. As an outcome, inflation rates slightly went down and credibility of the Lithuanian currency, the litas, increased. The paper concludes that under an instability in the transitional economies the Currency Board can serve as an anti-inflationary tool creating convertibility and credibility effects. Moreover, the exchange rate pegging might prevent the government's inflationary policy. The period after the reforms in Lithuania and also in Estonia is too short for definitive conclusions. But, from historical point of view the currency board's arrangements in those countries helped to reach the currency credibility and economic stability to a certain extent.

Currency Substitution via Expected Exchange Rate and Domestic MoneyDemand: An Empirical Analysis for Japan

Abstract: In this paper the currency substitution hypothesis is tested empirically on the Japanese money demand, using monthly data from January 1977 to December 1989. Under a flexible exchange rate a rational economic agent forms currency portfolios for both transaction and speculative reasons for demanding money. The nonlinear multivariate maximum likelihood estimation was used to estimate jointly the Japanese money demand and the expected exchange rate equation; possible existence of current substitution is found. The empirical results indicate that (a) the expected exchange rate for the Japanese yen/Canadian dollar shows currency substitution due to speculative demand, and (b) the expected exchange rate of the yen/US dollar shows currency substitution due to transaction demand.

Financial policy coordination in a keynesian framework

Abstract: We propose a simple framework within which to examine the problem of policy coordination between two central banks. The context is the various components of a broad measure of the money supply. Consider two central banks, one'monetarist' and the other 'Keynesian'. In each economy there is 'involuntary unemployment' of loans. It is show that the monetary authorities can strategically vary short-term interest rates in order to relax the constraint in the loan market so that none of the players is worse off. Both the banks play a zero-sum game with regard to foreign exchange reserves. Here too, the central banks can, via their influence on prices, increase the profits of firms providing thereby a credible signal to bank.

Comments on: The EU Facing Economic Opening-Up in Eastern Europe: Problems, Issues and Policy Options

Abstract: I would like to address several questions which are generally important for CEE countries. These questions are connected to potential barriers to the CEE countries’ integration with the EU.