1,721,984 research outputs found
Dollarization and semi-dollarization in Ecuador
Full text linkOver the 1980s and 1990s, GDP growth had stagnated because of oil export price volatility and natural disasters, the sacrifice of capital formation to heavy external public debt service, and incomplete and uneven structural reform. The exchange rate depreciation that proved continually necessary to sustain the net-export surplus and limit external debt accumulation induced Ecuadorians to dollarize spontaneously. The 1998 shocks affected real economic activity--hence bank loan portfolios, and widened the fiscal and current acccount deficits. The external imbalance led to exchange rate depreciation. Dollar-denominated bank loans whose borrowers lacked dollar income increasingly turned non-performing. At the same time, the depreciation swelled the locla currency value of dollar deposit liabilities. Many depositors, fearing that banks had become unsafe, withdrew, and over 1999 the Central Bank had to provide banks massive liquidity support. By year's end, the resulting monetary issue ledto the exchange rate collapse and incipient hyperinflation that forced the move to full dollarization. Ecuador's Central Bank will continue operating, using its foreign exchange holdings to carry out limited liquidity management and lender-of-last-resort activities. Ecuador's public accounts and banking system remain vulnerable to commodity-price and natural shocks. Exchange rate adjustment and monetary expansion are no longer available, however, to manage the external accounts, accommodate the public deficit, or assist failing banks. Further structural reform remains essential to assure fiscal discipline and banking system safety.Banks&Banking Reform,Economic Theory&Research,Payment Systems&Infrastructure,Environmental Economics&Policies,Public Sector Economics&Finance,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,Public Sector Economics&Finance,Financial Intermediation
When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options
Full text linkIn this paper we present evidence that capital account reversals have become more severe for emerging markets. Because policy options are limited in the midst of a capital market crisis and because so many countries have already had crises recently, we focus on some of the policies that could reduce the incidence of crises in the first place, or at least make the sudden stop problem less severe. In this regard, we consider the relative merits of capital controls and dollarization. We conclude that, while the evidence suggests that capital controls appear to influence the composition of flows skewing flows away from short maturities, such policies are not likely to be a long-run solution to the recurring problem of sudden capital flow reversals. Yet, because fear of floating, many emerging markets are likely to turn to increased reliance on controls. Dollarization would appear to have the edge as a more market-oriented option to ameliorate, if not eliminate, the sudden stop problem.capital flows, crises, emerging markets, sudden stops
Fixing for your life
Full text linkThe Asian crisis took place against a background of exchange rate regimes that were characterized as soft pegs. This has led many analysts to conclude that “the peg did it” and that emerging markets (EMs) should “just say no” to pegged exchange rates. We present evidence that EMs are very different from developed economies in key dimensions that play a key role when it comes to the choice of exchange rate regime--floating for EMs is no panacea. In EMs currency crashes are contractionary, the adjustments in the current account are far more acute. Credibility and market access, as captured in the behavior of credit ratings and interest rates, is adversely affected by devaluations or depreciations. Exchange rate volatility is more damaging to trade and the passthrough from exchange rate swings to inflation is far higher in EMs. These differences between emerging and developed economies may explain EMs reluctance to tolerate large exchange rate movements. In a simple framework we illustrate why large exchange rate swings are feared when access to international credit may be lost.financial crisis exchange rate passthrough volatility credit ratings banking downgrades
Crises and Sudden Stops: Evidence from International Bond and Syndicated-Loan Markets
Full text linkThe crises in Mexico, Thailand, and Russia in the 1990s spread quite rapidly to countries as far apart as South Africa and Pakistan. In the aftermath of these crises, many emerging economies lost access to international capital markets. Using data on international primary issuance, this paper studies the determinants of contagion and sudden stops following those crises. The results indicate that contagion and sudden stops tend to occur in economies with financial fragility and current account problems. They also show that high integration in international capital markets exposes countries to sudden stops even in the absence of domestic vulnerabilities.
Fear of floating
Full text linkMany emerging market countries have suffered financial crises. One view blames soft pegs for these crises. Adherents to that view suggest that countries move to corner solutions--hard pegs or floating exchange rates. We analyze the behavior of exchange rates, reserves, and interest rates to assess whether there is evidence that country practice is moving toward corner solutions. We focus on whether countries that claim they are floating are indeed doing so. We find that countries that say they allow their exchange rate to float mostly do not--there seems to be an epidemic case of “fear of floating.”exchange rates pegs reserves interest rates credibility fear of floating
Formulating a policy response: Reply to Snowden
Full text linkIn this short note we further discuss the role of macroeconomic policies to deal with surges in capital inflows. Primarily policies aimed at avoiding financial crises or an overvaluation of the real exchange rate.capital flows external factors policy
Inflows of capital to developing countries in the 1990s
Full text linkHalf a decade has passed since the resurgence of international capital flows to many developing countries. The recent surge in capital inflows was initially attributed to domestic developments, such as the sound policies and stronger economic performance of a handful of countries. Eventually, it became clear that the phenomenon was widespread, affecting countries with very diverse characteristics. This pattern suggested that global factors, like cyclical movements in interest rates, were especially important. This paper discusses the principal facts, developments and policies that characterize the current episode of capital inflows to Asia and Latin America.capital flows international interest rates monetary policy exchange rates
Tenuous Financial Stability
Full text linkMany countries fix their exchange rate in order to bring financial stability. Usually, inflation declines and output expands but contractual agreements retain their short time frame, investment is sluggish, and economic growth slows down a few years later. This outcome is often attributed to persistent doubts on the part of agents in the commitment and ability of the government to maintain the peg. Yet direct evidence for credibility is difficult to obtain. Unique survey data from Bulgaria reveal that expectations of devaluation were indeed very much present three, four, and five years after that country achieved financial stability under a currency board regime.Credibility, Currency boards, Stabilization programs
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