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Author: Ricardo J. Caballero
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 70
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Book Description
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. Even if such a reversal does not take place, its anticipation often leads to costly precautionary measures and recessions. In this paper, we characterize the business cycle of an economy that on average needs to borrow but faces stochastic financial constraints. We focus on the optimal financial policy of such an economy under different imperfections and degrees of crowding out in its hedging opportunities. The model is simple enough to be analytically tractable but flexible and realistic enough to provide quantitative guidance. Keywords: Capital Flows, Sudden Stops, Financial Constraints, Recessions, Hedging, Insurance, Signals, Contingent Credit Lines, Asymmetric Information. JEL Classification: E2, E3, F3, F4, G0, C1.
Author: Ricardo J. Caballero
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 70
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Book Description
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. Even if such a reversal does not take place, its anticipation often leads to costly precautionary measures and recessions. In this paper, we characterize the business cycle of an economy that on average needs to borrow but faces stochastic financial constraints. We focus on the optimal financial policy of such an economy under different imperfections and degrees of crowding out in its hedging opportunities. The model is simple enough to be analytically tractable but flexible and realistic enough to provide quantitative guidance. Keywords: Capital Flows, Sudden Stops, Financial Constraints, Recessions, Hedging, Insurance, Signals, Contingent Credit Lines, Asymmetric Information. JEL Classification: E2, E3, F3, F4, G0, C1.
Author: Ceyhun Bora Durdu
Publisher:
ISBN:
Category : Business cycles
Languages : en
Pages : 46
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Book Description
"Financial globalization had a rocky start in emerging economies hit by Sudden Stops. Foreign reserves have grown very rapidly since then, as if those countries were practicing a New Mercantilism that views foreign reserves as a war-chest for defense against Sudden Stops. This paper conducts a quantitative assessment of this argument using a stochastic intertemporal equilibrium framework in which precautionary foreign asset demand is driven by output variability, financial globalization, and Sudden Stop risk. In this framework, credit constraints produce endogenous Sudden Stops. We find that financial globalization and Sudden Stop risk can explain the surge in reserves but output variability cannot. These results hold using the intertemporal preferences of the Bewley-Aiyagari-Hugget precautionary savings model or the Uzawa-Epstein setup with endogenous impatience"--Federal Reserve Board web site.
Author: Mr.Fabian Valencia
Publisher: International Monetary Fund
ISBN: 1451963505
Category : Business & Economics
Languages : en
Pages : 27
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Book Description
Using precautionary savings models we compute levels of optimal reserves for Bolivia. Because of Bolivia's reliance on commodity exports and little integration with capital markets, we focus on current account shocks as the key balance of payments risk. These models generate an optimal level of net foreign assets ranging from 29 to 37 percent of GDP. For comparison purposes, we contrasted these results with standard rule of thumb measures of reserve adequacy, which in the case of Bolivia resulted in substantially lower levels of adequate reserves. These differing results emphasize the need to appropriately account for country-specific risks in order to derive adequate measures of reserve buffers.
Author: Dale Gray
Publisher: John Wiley & Sons
ISBN: 9780470756324
Category : Business & Economics
Languages : en
Pages : 362
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Book Description
Macrofinancial risk analysis Dale Gray and Samuel Malone Macrofinancial Risk Analysis provides a new and powerful framework with which policymakers and investors can analyze risk and vulnerability in economies, both emerging market and industrial. Using modern risk management and financial engineering techniques applied to the macroeconomy, an economic value can be placed on the risks posed by inter-linkages between sectors, the risk of default of different sectors on their outstanding debt obligations quantified, and the value ex-ante of guarantees to private sector entities by the government calculated. This book guides the reader through the basic macroeconomic and financial models necessary to understand the framework, the core analytical tools, and more advanced contributions that will be of interest to researchers. This unique synthesis of ideas from finance and macroeconomics offers several original contributions to the theory of financial crises, as well as a range of new policy options for governments interested in achieving a better tradeoff between economic growth and macro risk.
Author: Mr.Atish R. Ghosh
Publisher: International Monetary Fund
ISBN: 1463934432
Category : Business & Economics
Languages : en
Pages : 39
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Book Description
Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time?vulnerability to current account shocks was relatively important in the 1980s but, as EMEs have become more financially integrated, factors related to the magnitude of potential capital outflows have gained in importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country's position in the global reserves distribution. High reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks, and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons.
Author: Ms. Mitali Das
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 61
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Book Description
This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
Author: Pierre-Richard Agénor
Publisher: Princeton University Press
ISBN: 0691165394
Category : Business & Economics
Languages : en
Pages : 792
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Book Description
The global financial crisis triggered severe shocks for developing countries, whose embrace of greater commercial and financial openness has increased their exposure to external shocks, both real and financial. This new edition of Development Macroeconomics has been fully revised to address the more open and less stable environment in which developing countries operate today. Describing the latest advances in this rapidly changing field, the book features expanded coverage of public debt and the management of capital inflows as well as new material on fiscal discipline, monetary policy regimes, currency, banking and sovereign debt crises, currency unions, and the choice of an exchange-rate regime. A new chapter on dynamic stochastic general equilibrium (DSGE) models with financial frictions has been added to reflect how the financial crisis has reshaped our thinking on the role of such frictions in generating and propagating real and financial shocks. The book also discusses the role of macroprudential regulation, both independently and through its interactions with monetary policy, in preserving financial and macroeconomic stability. Now in its fourth edition, Development Macroeconomics remains the definitive textbook on the macroeconomics of developing countries. The most authoritative book on the subject—now fully revised and expanded Features new material on fiscal discipline, monetary policy regimes, currency, banking and sovereign debt crises, and much more Comes with online supplements on informal financial markets, stabilization programs, the solution of DSGE models with financial frictions, and exchange rate crises
Author: Subrata Ghatak
Publisher: Bloomsbury Publishing
ISBN: 1137021578
Category : Business & Economics
Languages : en
Pages : 320
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Book Description
This book highlights the basic principles of monetary economics and their application to developing countries. Fully illustrated, the new edition includes four entirely new chapters, with material on financial crises, the debates surrounding inflation targeting, and an examination of the role and future of financial institutions.
Author: Eduardo Levy Yeyati
Publisher: MIT Press
ISBN: 9780262122504
Category : Business & Economics
Languages : en
Pages : 364
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Book Description
Theoretical and empirical analysis of de jure dollarization. With the persistent instability of international financial markets, emerging economies are exploring new ways to reduce exposure to capital flow volatility. Some analysts argue that financially open economies are best served by more flexible regimes, while others argue in favor of extreme exchange rate regimes that have a strong commitment to a fixed parity or dispense with an independent currency. The successful launch of the euro has made more realistic the prospect of replacing a national currency with a strong foreign one. Recent examples include the adoption of the US dollar by Ecuador and El Salvador. The introduction of a foreign currency as sole legal tender, termed full (de jure) dollarization, has been the center of much political and academic debate. This book provides a comprehensive analysis of the issues from both theoretical and empirical perspectives. The topics discussed include the role of balance sheet effects, the linkage between currency risk and country risk, the impact of dollarization on trade, financial integration and credibility, the implications of dollarization for the lender of last resort, and the institutional and political economy aspects of dollarization.
Author: Mr.Javier Bianchi
Publisher: International Monetary Fund
ISBN: 1616359366
Category : Business & Economics
Languages : en
Pages : 40
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Book Description
Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.
