Showing papers on "Foreign-exchange reserves published in 2000"

One money, one market : the effect of common currencies on trade

Abstract: Currency unions Their dramatic effect on international trade A gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade. The panel data, bilateral observations for five years during 1970–90 covering 186 countries, includes 300+ observations in which both countries use the same currency. I find a large positive effect of a currency union on international trade, and a small negative effect of exchange rate volatility, even after controlling for a host of features, including the endogenous nature of the exchange rate regime. These effects, statistically significant, imply that two countries sharing the same currency trade three times as much as they would with different currencies. Currency unions like the European EMU may thus lead to a large increase in international trade, with all that that entails. — Andrew Rose

Currency Crises and Monetary Policy in an Economy with Credit Constraints

Abstract: This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a 'currency crisis' equilibrium with low 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 firms, and thus to a fall in their profits; this reduces firms' 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, fiscal, 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 fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms.

The Currency composition of Foreign Exchange Reserves : Retrospect and Prospect

Abstract: This paper examines the determinants of the currency composition of international reserves. Our single most important finding is the striking stability over time of the relationship between the demand for reserves denominated in different currencies and its principal determinants: trade flows, financial flows and currency pegs. This result contrasts sharply with recent predictions of sharp shifts in the currency composition of central banks’ holdings of foreign exchange. The message would seem to be that in this, as in other respects, the international monetary system is in a mode of gradual, continuous evolution, not of rapid, discontinuous change.

Currency Crises: In Search of Common Elements

Abstract: The paper seeks to identify common characteristics among a variety of macroeconomic and financial variables for a large sample of currency crises in industrial countries and emerging market economies. It covers crises which culminated in large currency depreciation as well as those in which there was a substantial loss of foreign reserves. The analysis involves comparing the monthly or annual pattern of movement of the various macroeconomic and financial variables around the time of crisis to their behavior during tranquil periods. The robustness of the results is tested by subdividing the sample into different types of currency crises and carrying out a similar analysis for each.

Currency Crises; In Search of Common Elements

Abstract: The paper seeks to identify common characteristics among a variety of macroeconomic and financial variables for a large sample of currency crises in industrial countries and emerging market economies. It covers crises which culminated in large currency depreciation as well as those in which there was a substantial loss of foreign reserves. The analysis involves comparing the monthly or annual pattern of movement of the various macroeconomic and financial variables around the time of crisis to their behavior during tranquil periods. The robustness of the results is tested by subdividing the sample into different types of currency crises and carrying out a similar analysis for each.

Wheels Within Wheels: Rethinking the Asian Crisis and the Asian Model

Abstract: The East Asian economic crisis of 1997–1999 had its causes not mainly in the “East Asian model” nor even in departures from the model, but in international capital markets and the governments of the core economies, especially the United States and Japan. The post–Bretton Woods system, without any link between the dollar and gold, allowed the United States to finance persistent external deficits by creating US government bonds. These bonds raised the foreign reserves of the surplus countries, notably Japan and East Asia. The rise in reserves triggered credit booms that generated asset inflation and industrial overcapacity. The booms gave way to crisis. The East Asian variant differed from the earlier Japanese one by being fueled by very large capital inflows in the early to mid 1990s from recession-hit Japan and Europe, as well as from the United States. This perspective, which highlights causes outside of East Asia, suggests that emerging market economies will remain vulnerable to such crises in the absen...

How Long Did It Take the United States to Become an Optimal Currency Area

Abstract: The United States is often taken to be the exemplar of the benefits of a monetary union Since 1788 Americans, with the exception of the Civil War years, have been able to buy and sell goods, travel, and invest within a vast area without ever having to be concerned about changes in exchange rates But there was also a recurring cost A shock, typically in financial or agricultural markets, would hit one region particularly hard The banking system in that region would lose reserves producing a monetary contraction that would aggravate the effects of the initial disturbance Plots of bank deposits by region show these patterns clearly Often, an interregional debate over monetary institutions would follow The uncertainty created by the debate would further aggravate the contraction During these episodes the United States might well have been better off if each region had had its own currency: changes in exchange rates could have secured equilibrium in interregional payments while monetary policy was directed toward internal stability It is far from clear, to put it differently, that the United States was an optimal currency area This pattern held until the 1930s when institutional changes, such as increased federal fiscal transfers (which pumped high-powered money into regions that were losing reserves) and bank deposit insurance, addressed the problem of regional banking shocks Political considerations, of course, ruled out separate regional currencies in the United States But thinking about US monetary history in this way clarifies the nature of the business cycle before World War II, and may suggest some lessons for other monetary unions

The 1994 currency crisis in Turkey

Abstract: This paper analyzes the 1994 crisis in Turkey. The period preceding the crisis witnessed a continuous deterioration of macroeconomic fundamentals. However, domestic debt financing of public deficits prevented reserve losses and an increase in inflation rate. It is argued that despite weak fundamentals of the period preceding the crisis, in the absence of policy “mistakes” that played a role of a series of shocks in the second half of 1993, the financial crisis could have been avoided.

The Currency Composition of Foreign Exchange Reserves

Abstract: This study examines the determinants of the currency composition of foreign exchange reserves for both industrial and developing countries. During the period from 1976-85, our empirical results indicate that the currency composition of reserves has been influenced by each country`s exchange rate arrangements, its trade flows with reserve currency countries, and the currency of denomination of its debt-service payments. The evidence is consistent with the view that managing the currency composition of a country`s net foreign asset position is done more cheaply by altering the currency of denomination of assets and liabilities that are not held as reserve assets.

Asymmetric Shocks and Monetary Policy in a Currency Union

Abstract: We analyze the conduct of monetary policy in a currency union in the face of asymmetric shocks. In particular, we compare the stabilization properties of a currency union versus alternative exchange rate arrangements. The relative performance of a currency union is shown to depend on the extent of economic integration in patterns of consumption and production and on the relative weights placed on price stability versus employment stability in the monetary authority's objective function. JEL classification: F33; F40

Ghana: Economic Development in a Democratic Environment

Abstract: This chapter explores the key relationships between participatory democracy and successful economic development and reviews the early steps of participatory decision making in Ghana. More generally, it sets the stage for a discussion of Ghana's main achievements and failures since 1992 in raising the standard of living of its population and reducing poverty. The high-profile political process that launched constitutional democracy in the 1990s and generated Ghana—Vision 2020 placed poverty reduction at the center of economic policy. Based on a set of price and unit labor cost indicators, Ghana's competitiveness improved in the early 1990s through 1994. The evidence for 1995–98 is quite strong. The Bank of Ghana is suspected to have used administrative means and moral suasion to influence the exchange rate, resisting the cedi's depreciation. The terms-of-trade shock forced the Bank of Ghana to focus more clearly on maintaining adequate foreign reserves. The depreciation may then have helped make the foreign exchange market more active and the nominal exchange rate more representative of market conditions.

'Here, Dollars, Dollars...' -- Estimating Currency Demand and Worldwide Currency Substitution

Abstract: I obtain very different percentage estimates of the American, German and Swiss currency that are held outside of these nations than previously done. My estimates are based on currency demand equations implied by cointegrating vectors for Canada, Holland, and Austria. In 1996, the United States estimate is much lower at 30% abroad and the German much higher at 69%. The U.S. estimate falls slowly over the 1960s and was as low as 5% in the early to mid 1970s, only to rise again in the late 70s-early 80s and during the 90s. 'Worldwide currency substitution' has roughly tripled in the past decade in constant dollar terms.

Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union

Abstract: Large current account imbalances have been recorded in the Baltics, Russia, and other countries of the former Soviet Union since their independence. Are these current account positions sustainable, reflecting the special circumstances of transition, or are the positions untenable over the longer term? This study attempts to address this important question by first describing recent current account developments in these transition economies. It subsequently focuses on a wide range of external sustainability indicators by drawing on the existing literature, and attempts to assess their potential usefulness in a transiton country context. The indicators examined include real exchange rates, fiscal revenues and expenditures, savings and investment developments, openness measures, growth projections, external debt composition, foreign exchange reserve cover, and various financial sector measures.

Banking and Currency Crises and Systemic Risk: Lessons from Recent Events

Abstract: Introduction and summary Many countries worldwide have experienced serious banking and/or currency (exchange rate or balance of payments) problems in recent years with high costs in terms of reduced income and increased unemployment to their own countries as well as others. A study by the International Monetary Fund (IMF) reported that more than 130 of the IMF's 180-plus member countries had experienced serious banking problems between 1980 and 1995, and this was even before the recent banking crises in East Asia--Korea, Thailand, Malaysia, and Indonesia--as well as in Russia (Lindgren, Garcia, and Saal, 1996). A map of countries experiencing banking crises is shown in figure 1. Lindgren et al. define serious problems to include banking crises that involve bank runs, collapses of financial firms, or massive government intervention, as well as less damaging but extensive unsoundness of institutions. With the primary exception of the U.K., the Benelux countries, [1] and Switzerland, most of the countries that avoided bank problems had no or nearly no modern banking systems. Currency crises were even more frequent than banking crises. They are typically defined as historically large depreciations in exchange rates and/or large declines in foreign reserves. Another IMF study of 53 industrial and developing countries identified 158 currency crises and only 54 banking crises in approximately the same time period (IMF, 1998a). Many countries suffered more than one such crisis during this period. A third study by Kaminsky and Reinhart (1996 and 1999) of 20 countries from 1970 to 1995 identified 71 currency crises and 25 ba nking crises. This article examines these twin banking and currency crises to attempt to identify their causes, particularly any similarities and interconnections, and their implications both for the country in which they occur and for other countries through possible contagion. Lastly, the article evaluates the effectiveness of alternative public policy initiatives introduced to mitigate if not prevent these crises and their accompanying potentially severe damage to the economy. Not only have banking and currency crises been frequent in number worldwide, but they have often been extremely costly in terms of both declines in real output and increases in transfer payments (wealth transfers) from taxpayers to bank depositors and other financial claimants whose funds were explicitly or implicitly insured or guaranteed at par value by the government. Thus, these crises are a major public policy concern. The IMF estimated that cumulative losses in gross domestic product (GDP) from potential (trend) growth in the 158 recent currency crises in 53 countries averaged 4.3 percent of the trend GDP values in each country and 7.1 percent in the 96 crises in which any output losses were suffered (IMF, 1998a). This is shown in table 1. The average time to return to trend value was about one and a half years. The output loss was greater in emerging economies than in developed economies, although the crises lasted somewhat longer in industrial than emerging economies. The estimated cumulative output loss from potential output in the 54 banking crises was significantly greater than in the currency crises, averaging 11.6 percent in all crises and 14.2 percent in the 44 crises that experienced an output loss. The loss was again greater for emerging than industrial economies. Moreover, banking crises last 3.1 years on average, twice as long as currency crises. In countries that experienced both a banking and a currency crisis simultaneously, the estimated output loss was greater than when each crisis was experienced separately. The average cumulative output loss was 14.4 percent in the 32 such crises observed and this time was greater for industrial than emerging economies. [2] The average time for recovery averaged about the same as for a banking crisis alone, but increased sharply for industrial countries to nearly six years. …

Bank for International Settlements (BIS)

Abstract: Origin. Founded on 17 May 1930, the Bank for International Settlements fosters international monetary and financial co-operation and serves as a bank for central banks.

The Eastern Caribbean Currency Union--Institutions, Performance, and Policy Issues

Abstract: The Eastern Caribbean Central Bank is one of just a few regional central banks in the world and the only one where the member countries have pooled all their foreign reserves, the convertability of the common currency is fully self-supported, and the parity of the exchange rate has not changed. This occasional paper reviews recent developments, policy issues, and institutional arrangements in the member countries of the Eastern Caribbean Currency Union, and looks at the regional financial system, its supervision, and the central bank's initiatives to establish a single financial space. The paper includes a large amount of statistical information that is not readily available elsewhere from a single source.

The Asian Financial Crisis and Its Aftermath: Do We Need a Regional Financial Arrangement?

Abstract: I. Introduction Following the collapse of the Thai baht's peg on 2 July 1997, the financial markets in East Asia were in turmoil until mid-1998. On 11 July, the Philippines and Indonesia widened the trading band of their currencies from 8 to 12 per cent. On 14 July, Malaysia abandoned the defence of the ringgit, and Prime Minister Mahathir Mohamad launched a bitter attack on "rogue speculators".(1) Indonesia abandoned its managed floating system on 14 August. The Korean won also depreciated, following a futile currency defence that cost Korea most of its foreign reserves. This forced Korea, the world's 11th largest economy,(2) to seek financial assistance from the International Monetary Fund (IMF) on 21 November 1997. Korea widened its won trading band from 2.25 to 10 per cent on 19 November, and then allowed the won to float on 16 December. Many academic researchers and pundits have argued that these domino effects among the Asian currencies were mainly attributable to regional structural weakness. The unpleasant term coined to describe this structural weakness is "Asian cronyism". The moral hazard problem in the corporate and financial sectors created by the incestuous relationship between the government and the private sector has been stressed in some more gentle articles.(3) Among the Asian emerging economies, Thailand, the Philippines, Malaysia, Indonesia, and Korea have been the ones most severely affected. Prior to the crisis, the net flow of private capital to the five crisis-affected Asian countries increased from US$24.9 billion in 1990 to US$102.3 billion in 1996. This massive capital inflow into the region became almost nil (US$0.2 billion) in 1997 and reversed to a massive capital outflow in 1998 (US$27.6 billion). Contrary to popular opinion in most creditor countries, however, the economic crisis in Asia is not an "Asian" crisis. The conditions that precipitate the crisis are by no means unique to the region. They have their roots in badly managed liberalization of the financial sector, excessive borrowing and lending by private agents, and the inability and unwillingness of key players -- including governments -- to accurately assess risks. The resulting collapse of domestic financial and currency markets is a phenomenon already observed in the 1990s in Europe, Latin America, and now Asia. Furthermore, continued spillover effects of the Asian crisis hit Russia and reached Latin America and even the oil-exporting countries. More vividly, severe fallout from the Asian and Russian crises landed on the U.S. shore and forced the U.S. Federal Reserve to bailout the Long-Term Capital Management (LTCM), a very large and highly leveraged hedge fund, to prevent further negative implosion from affecting the entire U.S. credit market. At that time, many serious economists expressed concerns about the possibility of global recession, or in the worst case, global depression. In retrospect, the Asian financial crisis and its policy implications can be understood on the national, regional, and global dimensions. At the national level, both directly and indirectly affected countries have to strengthen their defensive countermeasures to prevent future financial crises. For this purpose, countries under the IMF programme, including Thailand, Indonesia, and Korea, have undertaken macroeconomic stabilization policies and bold structural reforms in financial and corporate sectors. As a result, usable foreign reserves have accumulated dramatically and the structure of external debts has much improved. In addition, policy-makers are very serious about structural reforms, although a sense of complacency can be observed among consumers, businesses, and trade unions. At the regional level, there were also many calls for financial co-operation just after the Asian financial crisis broke out. However, the discussion on regional financial co-operation has largely remained within the realm of academia and has not been able to produce any tangible result. …

The Polish Zloty, 1990-1999: Success and Underperformance

Abstract: Exchange-rate regimes in transition economies over the last decade have spanned the entire spectrum of possibilities, going from freely floating to permanently fixed (currency boards, DM-ization) through managed floats, preannounced crawling rates, and bands with or without intermittent adjustments Such extreme diversity is due to differences in available foreign reserves and in initial macroeconomic imbalances (especially the presence of a monetary overhang in some transition economies) and to differences in government preferences between inflation and unemployment Performance of alternative exchange-rate regimes is difficult to assess, (i) because performance can be mixed, (ii) because all exchange regimes if sustained have a tendency to validate themselves via their impact on inflation, and above all, (iii) because performance depends on the entire package of public policy instruments (fiscal, monetary, and structural) and on exogenous factors, as well as the exchange-rate regime itself Poland (1990-1999) bears out these considerations nitially (starting 1 January 1990) a fixed exchange rate was selected, pegged to the US dollar at the then-prevailing free-market rate; it was backed by a $1,000 million stabilization fund provided by the G-24 which was not used but enhanced regime credibility Monetary overhang had been virtually eliminated by earlier rounds of price increases and of zloty devaluations in 1989 Government preferences for disinflation assigned to the exchange rate the role of nominal anchor for the entire stabilization program The fixed rate, expected to last no more than 3-4 months, in spite of massive inflation (249 percent in 1990 alone) was maintained until May 1991, when a 17-percent devaluation occurred and, the peg switched to a currency basket (full details are given in Table 1) Subsequently, concerns about externlc balance and the maintenance of trade competitiveness led to a crawling-peg regime, with intermittent additional devaluations, then to an increasingly broader band around a central parity crawling at rates progressively decreasing over time (see Table 1 and Figs 1 and 2) As in every transition economy, the real exchange rate has been steadily revalued from an initial gross undervaluation Unlike most transition economies, however, Poland gradually has been able to consolidate the exchange rate (see Fig 1), stabilize the crawling regime, and even experience occasional nominal revaluations (see Fig 2)

Causes and consequences of the Asian financial crisis

Abstract: The financial crisis that erupted in 1997 and engulfed Asia in gloom through the end of the millennium came as a shock to virtually all observers. The preceding decade had witnessed the end of the Cold War and the apparent triumph of liberal capitalism. Controversies over the benefits of trade and direct foreign investment had declined, as globalisation and liberalisation seemed to expand inexorably. In the developing world, periodic financial crises were hardly new, of course, but they had typically occurred in countries with weak export sectors and obvious macroeconomic imbalances such as uncontrolled inflation, inadequate domestic savings and gaping deficits in government budgets (IMF 1998a). The Asian financial crisis, in contrast, delivered an unprecedented blow to a region that had managed to bring its macroeconomic house into reasonably good order and had sustained decades of rapid growth driven by exports. The effects of the crisis throughout East Asia were more severe than any since the great depression of the 1930s. In Indonesia, the fourth most populous country on earth, the impact was shattering. In 1998, the economy contracted by nearly 14 per cent. Korea's economic reversals surpassed anything since the Korean War of the early 1950s. Thailand and relatively affluent Malaysia experienced an abrupt reversal of longterm growth trends. Even Hong Kong and Singapore, the wealthiest and most sophisticated economies in Asia outside Japan, suffered deeply as their trading partners fell into crisis.

The Unorthodox Origins of the Asian Currency Crisis: Evidence from Logit Estimation

Abstract: I. Introduction The Asian financial crisis, which started on 2 July 1997, was the third region-wide currency crisis in the 1990s. The first regional currency collapse was in Europe in 1992-93 and the second was in Latin America in 1994-95. One would have hoped that the voluminous research dissecting these earlier crises would have given governments and the International Monetary Fund (IMF) some ideas on how to read signs of an approaching regional storm. However, no red lights appeared to have flashed warnings of a crisis for the entire East Asian region before mid- 1997. Only Thailand, with its large current account deficits in 1995 and 1996, looked a possible candidate for a devaluation, and even then the cautionary remarks on Thailand were hedged because these current accounts were seen to be financed by private capital inflows and hence to be sustainable in the medium term. Were the exchange rate collapses in 1997 in Asia really unexpected as claimed by the governments in these countries? It would be naive, of course, not to recognize that these governments would find it convenient to attribute the currency collapses on financial contagion, and divert blame away from any bad policies the governments had implemented. But it would be equally naive not to recognize that financial panic has been part of the human condition ever since asset markets were established.(1) This article attempts to answer whether the currency crises in Indonesia, Malaysia, the Philippines, South Korea and Thailand (henceforth known as the Asian Crisis-5) in 1997-98 were due to a deterioration in their macroeconomic fundamentals or due to financial contagion. Our analysis proceeds in two parts. In the first part, we construct a new real exchange rate index, the Competitor-Weighted Real Exchange Rate (CWRER) for each of the Asian Crisis-5, that emphasizes the currency and price movements of the countries that compete against its top 10 exports. The question asked in the first part is whether loss in trade competitiveness was the over-riding reason for the crisis. The results were ambiguous. In the second part of the paper, we use a richer set of fundamentals to construct a logit model that allowed us to formally estimate the probability of a currency crisis occurring for the five Asian countries in 1997, given the information set that existed in 1996. Our results show that the macroeconomic fundamentals did not predict the currency crises -- thus supporting the claim that the Asian currency crisis was unexpected by investors, governments, and the IMF. We interpret this result as evidence that financial contagion was the main cause of the Asian crisis. This paper is organized as follows. Section II reviews the literature on currency crises. Section III discusses the movements in the real exchange rate of the Asian Crisis-5. Section IV reports the results of the logit estimations. Finally, Section V presents our conclusions. II. Literature Review Roughly speaking, the theoretical literature on currency crisis has gone through three generations. The first generation models identify the source of currency crisis to be misalignment between macroeconomic policies, and the value at which the currency is pegged. The second-generation models emphasize the existence of multiple equilibria and self-fulfilling prophecies. The third generation models highlight the dire consequences of over-investment induced by a moral hazard created either by implicit government guarantee of private debt or by implicit guarantee of a country's foreign debt by the International Monetary Fund (IMF). Krugman (1979) is typical of first generation models. An over-expansionary fiscal deficit is financed by money creation, and this leads to a deficit in the balance of payments that requires the government to run down its foreign exchange reserves to defend the exchange rate peg. Since the country's stock of foreign reserves is finite, the steady decline in the foreign reserves of the central bank will increase the number of speculators who recognize that a devaluation would be forthcoming. …

Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union

Abstract: Large current account imbalances have been recorded in the Baltics, Russia, and other countries of the former Soviet Union since their independence. Are these current account positions sustainable, reflecting the special circumstances of transition, or are the positions untenable over the longer term? This study attempts to address this important question by first describing recent current account developments in these transition economies. It subsequently focuses on a wide range of external sustainability indicators by drawing on the existing literature, and attempts to assess their potential usefulness in a transiton country context. The indicators examined include real exchange rates, fiscal revenues and expenditures, savings and investment developments, openness measures, growth projections, external debt composition, foreign exchange reserve cover, and various financial sector measures.