definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

balance of payment crises in emerging markets how early were the early warning signals although many papers have already proposed empirical models of currency crises the timing of such crises has received relatively little attention so far most papers use indeed a static specification and impose the same lag structure across all explanatory variables this by construction prevents from specifically timing the crisis signals sent by the leading indicators the objective here is to fill this gap by considering a set of dynamic discrete choice models the first contribution is to identify how early in advance each explanatory variable sends a warning signal some indicators are found to signal a crisis in the very short run while others signal a crisis at more distant horizons the second contribution is to show that state dependence matters albeit mostly in the short run the results have important implications for crisis prevention in terms of the timeliness and usefulness of the envisaged policy response

analysis of tailored base surge policies in dual sourcing inventory systems we study a model of a firm managing its inventory of a single product by sourcing supplies from two supply sources a regular supplier who offers a lower unit cost and a longer lead time than a second emergency supplier a practically implementable policy for such a firm is a tailored base surge tbs policy allon g van mieghem ja 2010 global dual sourcing tailored base surge allocation to near and offshore production management sci 56 1 110 124 to manage its inventory under this policy the firm procures a constant quantity from the regular supplier in every period and dynamically makes procurement decisions for the emergency supplier allon and van mieghem describe this practice as using the regular supplier to meet a base level of demand and the emergency supplier to manage demand surges and they conjecture that this practice is most effective when the lead time difference between the two suppliers is large we confirm these statements in two ways first we show the following analytical

the impact of distressed economies on the eu sovereign market financially distressed economies inside the european union eu are being blamed for producing a general increase in borrowing costs this article analyzes the channels of default risk transmission within the eu countries using the information content in the sovereign credit default swap cds market we proceed in two directions first we test the existence of cross border volatility effects between the central and the peripheral eu countries second we explore the effect of distressed economies on the default and risk premium constituents of sovereign default swaps we show a significant volatility spillover from distressed to central european economic and monetary union emu economies this causality pattern leads to a significant impact on the default swap risk premia on average the risk premium accounts for approximately 42 of central emu spreads and 56 of the spreads for those countries outside of the emu the peripheral risk also affects the default component of central economies although its impact is lower

large versus small players a closer look at the dynamics of speculative attacks what is the role of large players e g hedge funds in speculative attacks recent work suggests that large players move early to induce smaller agents to attack however many observers argue that large players move late in order to benefit from interest rate differentials we propose a model in which large players can do both using data on currency trading by foreign large and local small players we find that foreign players moved last in three attacks on the norwegian krone during the 1990s during the attack on the swedish krona after the russian moratorium in 1998 foreign players moved early gains by delaying attack were small however because interest rates did not increase

firm optimism and pessimism abstract this paper explores the question of whether firms have systematic expectation biases using microdata from the west german manufacturing subset of the ifo business climate survey we infer quarterly production growth rates at the firm level we then combine this information with production growth expectations over a quarterly horizon to construct quantitative firm specific expectation errors our findings show that at most one third of our firms systematically over or underpredict their production growth one quarter ahead our findings further show that larger and exporting firms tend to have more realistic expectations while firms with higher leverage are more prone to expectations that are biased towards optimism

optimality of myopic ordering policies for inventory model with stochastic supply this paper addresses a discrete time inventory model where the maximum amount of supply from which instantaneous replenishment orders can be made is a random variable optimal ordering policies are characterized as critical number policies with monotone increasing optimal critical values a sufficient condition is then presented for myopic ordering policies to be optimal

measuring and estimating exchange market pressure in the eu abstract this paper estimates a model of exchange market pressure for several eu currencies vis a vis the german mark over the period 1980 94 it differs from previous work in that we use principal components analysis to derive a measure of exchange market pressure rather than adding exchange rate and reserves changes or using ad hoc weighting schemes secondly we also try to explain movements in our measure of exchange market pressure by a wealth augmented monetary model the results suggest that exchange market pressure can indeed be explained by differential money growth the change in the long term interest rate differential real depreciation budget deficit and the current account for five members of the eu s exchange rate mechanism

what do twins share a joint probit estimation of banking and currency crises we study the determinants of twin crises and investigate the direction of causality between banking and currency crises in emerging markets we model banking and currency crises as dynamic events correlated over time and jointly estimate their probability using panel data simulation techniques we show that banking and currency crises are closely intertwined and are driven by common fundamentals banking crises exhibit strong state dependence suggesting that countries that have experienced a banking crisis in the past are more prone to experience another crisis finally we find evidence of unobserved heterogeneity and autocorrelation in the error term structure

optimal portfolio choice and the collapse of a fixed exchange rate regime abstract a model is presented that accounts for empirical macroeconomic regularities accompanying exchange rate crises assuming the central bank can surprise the private sector about its monetary policy we solve for agents consumption and portfolio decisions and the economy s equilibrium prices and interest rates using an intertemporal asset pricing model prior to a collapse a peso problem will always exist and the central bank will lose reserves in excess of domestic credit creation at the time of the collapse the exchange rate may depreciate unexpectedly the dynamics of a country s return to fixed exchange rates are also analyzed

learning in expectation formation with applications to cattle and beef exports the paper briefly considers problems associated with rational expectations and formulates a more general model which allows for situations where economic agents do not immediately arrive at a fully rational solution it incorporates a learning mechanism whereby agents can provisionally adopt hypothetically derived expectations as a basis for comparison with the actual outturns utilizing the resultant past expectational errors as indicators of the likelihood of prospective future outcomes agents make explicit allowance a rational solution thus in situations where complete information is not freely available rationality would be approximated over time by means of a dynamic learning process which is founded on a firm empirical approach this essential empiricism requires that the problem be examined on the basis of direct observation of applied situations therefore the method is implemented and analysed with reference to irish foreign trade in fat cattle carcase and processed beef simultaneous equati

a periodic review production planning model with uncertain capacity and uncertain demand optimality of extended myopic policies increasing product complexity manufacturing environment complexity and an increased emphasis on product quality are all factors leading to uncertainties in production processes these uncertainties are in the form of unplanned machine maintenance varying production yields and rework among others in planning for production an adequate model must incorporate these uncertainties into the representation of the production process this paper treats the aggregate planning problem for a single product with random demand and random capacity in the single period problem random capacity does not affect the optimal policy but results in a unimodal nonconvex cost function in the multiple period and infinite horizon settings order up to policies that are dependent on the distribution of capacity are shown to be optimal in spite of a nonconvex cost in the infinite horizon setting an intuitive description of the situation leads to the notion of a class of extended myopic policies requiring the consideration o

can leading indicators assess country vulnerability evidence from the 2008 09 global financial crisis abstract we investigate whether leading indicators can help explain the cross country incidence of the 2008 09 financial crisis rather than looking for indicators with specific relevance to the recent crisis the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators our motivation is to address suspicions that indicators found to be useful predictors in one round of crises are typically not useful to predict the next round the review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and episodes in the past for the 2008 09 crisis we use six different variables to measure crisis incidence drops in gdp and industrial production currency depreciation stock market performance reserve losses and participation in an imf program we find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008 09 crisis in line with the conclusions of the pre 2008 literature in addition to reserves recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis we define the period of the global financial shock as running from late 2008 to early 2009 which probably explains why we find stronger results than earlier papers such as obstfeld et al 2009 2010 and rose and spiegel 2009a b 2010 2011 which use annual data

the politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

a new approach to modeling early warning systems for currency crises can a machine learning fuzzy expert system predict the currency crises effectively abstract this paper presents a hybrid causal model for predicting the occurrence of currency crises by using the neuro fuzzy modeling approach the model integrates the learning ability of the neural network with the inference mechanism of fuzzy logic the empirical results show that the proposed neuro fuzzy model leads to a better prediction of crisis significantly the model can also construct a reliable causal relationship among the variables through the obtained knowledge base compared to neural network and the traditionally used techniques such as logit the proposed model can thus lead to a somewhat more prescriptive modeling approach based on determinate causal mechanisms towards finding ways to prevent currency crises

government spending and budget deficits in the industrial economies fiscal policy nouriel roubini and jeffrey sachs this paper examines the evolution of the size of government and of budget deficits in oecd economies we highlight the rapid increase in government spending in the 1970s the sharp rise in budget deficits and public debt after 1973 and the reversal in these trends in the 1980s the increase in the size of government was associated in part with the slowdown in growth after 1973 but also reflected gradual adjustment of the ratio of spending to output towards a long run target which depends on political and institutional characteristics of the economy the political orientation of the government the degree of wage indexation and the degree of stability of the political system such factors also explain the size of budget deficits when faced with an adverse shock subsequent deficit reduction requires a measure of political consensus we note that such consensus is hard to achieve in multi party coalitions in consequence countries with such a political structure tended in consequence countries with such a political structure tended toin consequence countries with such a political structure tended to experience much more rapid increases in their debt gnp ratios

capital controls and balance of payments crises abstract the theory of balance of payments crises shows that under perfect foresight a system of fixed exchange rate is not sustainable in the presence of diverging economic policies in this paper it is shown how and why capital controls succeed in maintaining the principle of a fixed but adjustable parity both cases of a devaluation and a revaluation are considered and a condition for a parity change to be credible is presented

determinants of the implied shadow exchange rates from a target zone abstract the paper provides a continuous time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments in the case of a realignment the exchange rate jumps to a shadow exchange rate the timing of realignments is modelled by a cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate we set up an approximate maximum likelihood estimation approach and provide parameter estimates for six erm target zones moreover in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short run and long run behavior of the filtered shadow exchange rates

an approximate policy for a dual sourcing inventory model with positive lead times and binomial yield this paper studies the inventory system of a retailer who orders his products from two supply sources a local one that is responsive and reliable but expensive and a global one that is low cost but less reliable the deliveries from the global source only partially satisfy the quality requirements we model this situation with a dual sourcing inventory model with positive lead times and random yield we propose a dual index order up to policy dop based on approximating the inventory model with an unreliable supplier by a sequence of dual sourcing models with reliable suppliers and suitably modified demand distributions numerical results show that the performance of this heuristic is close to that of the optimal dop moreover we extend the heuristic to models with advance yield information and study its impact on the total inventory costs

political and institutional factors in regime changes in the erm an application of duration analysis this paper analyses the functioning of the european exchange rate mechanism erm to that end we apply duration models to estimate an augmented target zone model explicitly incorporating political and institutional factors into the explanation of european exchange rate policies the estimations are based on quarterly data of eight currencies participating in the erm covering the complete history of the european monetary system our results suggest that both economic and political factors are important determinants of erm currency policies concerning economic factors the money supply the real exchange rate the interest rate in germany and the central parity deviation would have negatively affected the duration of a given central parity while credibility and the price level in germany would have positively influenced such duration regarding political variables elections central bank independence and left wing administrations would have increased the probability of maintaining the current regime while unstable governments would have been associated with more frequent regime changes moreover we show how the political augmented model outperforms the model which just incorporates pure economic determinants both in terms of explanatory power and goodness of fit

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

buying and selling attacks on fixed exchange rate systems abstract in this paper we show how rational expectations models of speculative attacks on fixed exchange rate systems can be extended to take into account the possibility that the central bank could be forced to either devalue or revalue essential to the analysis are the concepts of buying attack and selling attack by means of which we were able to describe how expectations about the future exchange rate are formed we also provide a discussion on the problem of uniqueness of the equilibrium that may arise in this kind of speculative attack models

price and demand expectations in the swedish manufacturing industry the purpose of this analysis is to test the rational expectations re hypothesis on the basis of a quite unique data set of swedish manufacturing firms price and demand expectations the data are qualitative and consist of responses from approximately 1 700 firms to questions regarding the actual and expected development of their own prices and demand since the data are qualitative the standard technique of regression analysis cannot be used instead the tests are based on measures of association for contingency tables and on estimation of log linear models for qualitative variables similar techniques have been used in studies on expectation formation in germany and france see konig et al 1981 nerlove 1983 kawasaki and zimmermann 1986 and zimmermann 1986 the concept of rational expectations is discussed in section ii the data are described in section iii the tests are presented in section iv and the results of the tests are reported in section v section vi contains the main conclusions

manufacturers expections of prices and quantities new zealand experience 1964 87 most empirical work on expectations has focused on price expectations this paper extends that work by evaluting the properties of manufacturers expectations of a range of nominal and real variables the data for this study consist of individual firm responses to the new zealand institute of economic research s quaterly tendency survey over an unusally long period of 24 years from 1964 to 1987 measures of accuracy bias and effiency are constructed and the results indicate that the properties fo expectations differ across variables and conclusions drawn from empirical studies of price expectations should not be generalized manufacturers are more accurate at forecasting changes in prices than quantities the mainstream rational expectations hypothesis is rejected for most of the quantity variables but the case for rejection was not so clear for expectations of prices and costs the results are consistent with the view that price expectations behave more like plans than forecasts firms views about co

learning and complementarities in speculative attacks we study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision we show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non fundamental volatility into exchange rates and policy decisions we show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market and that transparency may either increase or decrease the effectiveness of learning from the market depending on how it is implemented

a non stationary periodic review production inventory model with uncertain production capacity and uncertain demand abstract in this paper we consider a nonstationary periodic review dynamic production inventory model with uncertain production capacity and uncertain demand the maximum production capacity varies stochastically it is known that order up to or base stock critical number policies are optimal for both finite horizon problems and infinite horizon problems we obtain upper and lower bounds of the optimal order up to levels and show that for an infinite horizon problem the upper and the lower bounds of the optimal order up to levels for the finite horizon counterparts converge as the planning horizons considered get longer furthermore under mild conditions the differences between the upper and the lower bounds converge exponentially to zero

capital controls and exchange rate instability in developing economies abstract a large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability this paper investigates whether legal restrictions on international capital flows are associated with greater currency stability we employ a comprehensive panel data set of 69 developing economies over the 1975 1997 period identifying 160 currency crises we control for macroeconomic political and institutional characteristics that influence the probability of a currency crisis employ alternative measures of restrictions on international payments and account for possible joint causality between the likelihood of a currency attack and the imposition of capital controls we find evidence that restrictions on capital flows do not effectively insulate economies from currency problems rather countries with less restrictive capital controls and more liberalized regimes appear to be less prone to speculative attacks

testing the rationality of inflation expectations derived from survey data a structure based approach following the inspiration of muth 21 expectations are said to be rational if the subjective probability distribution of expected outcomes coincides with the objective probability distribution of actual outcomes in practical applications however it is common to employ the so called weak form version of this hypothesis which defines rationality as equality between the expected outcome and the objective mathematical expectation conditional on all data available at the time the expectation is formed thus expectations of inflation are said to be weakly rational in muth s sense if

currency crises and institutions abstract this study furthers recent literature on currency crises and institutions the main objective is to re evaluate the causes of currency crises by focusing on the role played by a broader array of institutional factors and crisis episodes than have previously been considered while at the same time controlling for economic factors our dataset consists of over 30 countries covering 13 institutional factors for the period 1984 2002 two questions are addressed they are 1 what mix of institutions may contribute to or set the stage for a currency crisis and 2 what mix of institutions may affect the depth of currency crises as measured by a decline in output our findings reveal that institutional as well as economic factors affect the probability of currency crises and that worse institutions are associated with bigger contractions in output during the crisis in general our strongest results regarding institutions show that corruption a de facto fixed exchange rate regime weak government stability and weak law and order increase the probability of a currency crisis we find mixed evidence that deposit insurance the removal of capital controls a lack of central bank independence financial liberalization and civil law increase the chance of crisis we find a similar set of factors worsens the contraction in output during a crisis except for deposit insurance which we find moderates the contraction in output

liability dollarization exchange market pressure and fear of floating empirical evidence for turkey the objective of this article is to examine the relationship between liability dollarization and the exchange market pressure emp in turkey within an autoregressive distributed lag ardl and granger causality framework using monthly data from 1991 12 to 2006 08 the findings suggest that there exists a long term equilibrium relationship between emp and liability dollarization where liability dollarization granger causes emp both in the short and long run with no evidence of reverse causality this suggests that the predominance of foreign currency liabilities in the banks balance sheets in turkey induces a selling pressure in the exchange market as well as a fear of floating

what drives consumption booms consumption booms have been common in both industrial and developing countries and several explanations have been offered for their occurrence these include economy wide wealth effects associated with favorable movements in the terms of trade or euphoric expectations triggered by macroeconomic reforms ricardian effects associated with fiscal stabilization lending booms following financial liberalization and a variety of distortions in inter temporal relative prices using a large cross country sample of booms this article assesses how widely applicable these explanations are the key finding is that wealth effects linked to favorable movements in the terms of trade and anticipated improvements in macroeconomic performance seem to have been more important empirically than explanations relying primarily on fiscal phenomena or distortions in inter temporal relative prices

myopic optimal policy for a multi period two delivery lead times stochastic inventory problem with minimum cumulative commitment and capacity abstract this paper studies a single product multi period stochastic inventory problem that imposes the lower and upper bounds on the cumulative order quantity during a planning horizon and allows two delivery lead times this model includes three features the first one is that a buyer purchases a fixed capacity from a supplier at the beginning of a planning horizon and the buyer s total cumulative order quantity during the planning horizon is constrained with the capacity the second one is that the buyer agrees to purchase the product at least a certain percentage of the purchased capacity during the planning horizon the third one is that the supplier allows the buyer to order the product with two delivery lead times we identify conditions under which a myopic ordering policy is optimal we also develop an algorithm to calculate the optimal capacity when the minimum cumulative order quantity commitment is a certain percentage of the capacity we then use the algorithm to evaluate the effect of the various parameters on the buyer s minimum expected total cost during the planning horizon our computation shows that the buyer would benefit from the commitments and two delivery lead times

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

comments on monetary policy announcements and expectations evidence from german firms abstract enders et al 2019b find that small expansionary monetary policy surprises lead to increases in firms price and production expectations vice versa for small contractionary monetary surprises for larger monetary surprises of either direction the reaction of price and production expectations tends to be dampened back to zero this finding is explained with a differential size dependent mix in monetary policy surprises as regards their actual monetary policy content and their delphic information content about how the monetary authority views the state of the economy policy conclusions from this result for the conduct of monetary policy and its communication are discussed

speculative attacks with unpredictable or unknown foreign exchange reserves during a currency crisis speculators usually do not know the value of a central bank s foreign exchange reserves in this paper i show that modelling speculators as having imperfect knowledge of reserves enriches the predictions of the classical model of specula tive attacks with realistic lags in reserve reporting and costs to unsuccessful speculation successful speculative attacks will involve a jump depreciation unsuccessful attacks may occur attacks may occur when fundamentals are improving attacks may not be preceded by large increases in interest rates and fixed exchange rates may be abandoned with no attack and no decline in the money supply jel classification f3 1 attaques speculatives quand les reserves de devises etrangeres sont soit imprevisibles soit inconnues au cours d une crise monetaire les speculateurs ne connaissent pas normalement la valeur des reserves de devises etrangeres que la banque centrale a en main ce memoire montre qu une modelisation des speculateurs en postulant qu ils ont une connaissance imparfaite des reserves permet d enrichir les predictions du modele classique des attaques speculatives a partir d une evaluation realiste des delais dans les rapports sur la quantite de reserves et des couits d une speculation ratee on deter mine que les attaques speculatives reussies vont impliquer que se produise une deprecia tion discontinue que des attaques speculatives ratees puissent se produire que des attaques peuvent se produire quand les donnees fondamentales s ameliorent que des at taques ne peuvent pas etre precedees par de fortes augmentations des taux d interet et que des taux de change fixes peuvent etre abandonnes sans attaques et sans chute dans

gold monetization and gold discipline gold and its price have emerged as frequent topics of both academic and government debate 2 public attention focused on the gold market since gold s price began fluctuating violently in 1980 and 1981 has turned to gold as a possible means of removing some discretion inherent in the current fiat money system since lack of adherence to monetary rules can lead to problems of dynamic policy inconsistency academic economists have begun seriously to reconsider monetary standards based either on gold or on some other commodity as politically feasible methods of establishing rules 3

the globalization of liberalization policy diffusion in the international political economy one of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world these policies have affected the lives of millions of people yet our most sophisticated political economy models do not adequately capture influences on these policy choices evidence suggests that the adoption of liberal economic practices is highly clustered both temporally and spatially we hypothesize that this clustering might be due to processes of policy diffusion we think of diffusion as resulting from one of two broad sets of forces one in which mounting adoptions of a policy alter the benefits of adopting for others and another in which adoptions provide policy relevant information about the benefits of adopting we develop arguments within these broad classes of mechanisms construct appropriate measures of the relevant concepts and test their effects on liberalization and restriction of the current account the capital account and the exchange rate regime our findings suggest that domestic models of foreign economic policy making are insufficient the evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country s sociocultural peers we interpret the latter influence as a form of channeled learning reflecting governments search for appropriate models for economic policy

the mexican peso crisis sudden death or death foretold abstract we argue that allowing for the possibility of a self fulfilling panic helps to understand several features of the recent mexican crisis self fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short term dollar debt we present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt but not for others lastly we argue that the imperfect credibility of mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994 our model formalizes the reasons why this is so

estimating the degree of interventionist policies in the run up to emu based on a theoretical monetary exchange rate model in continuous time this article establishes a sequential estimation framework which is capable of indicating central bank intervention in the run up to a currency union using daily pre european monetary union pre emu exchange rate data for the countries of the current euro zone we find mixed evidence of active pre emu intervention policies so called institutional frontloading strategies our estimation framework is highly relevant to economic and political agents operating in financial markets of the upcoming emu accession countries

rogues and regulation in global finance maxwell leeson and the city of london clark g l 1997 rogues and regulation in global finance maxwell leeson and the city of london reg studies 31 221 236 in this paper i explore the culture of the finance industry in general and in particular the problems of dealing with socalled rogue behaviour in the context of regulation and regulatory regimes the reference points for analysis are the recent cases of robert maxwell the british entrepreneur who is thought by many to have systematically fleeced his companies pension funds to finance complex corporate deals and nick leeson the barings trader in singapore who it is commonly believed single handedly bankrupted the bank while no doubt provocative and the subjects of considerable speculation regarding their true motives i argue that the maxwell and leeson cases are representative of a strategy of demonization and selective representation designed to protect the reputations of existing institutions in this respect i focus upon three issues the representation of behavio

a production inventory system with markovian capacity and outsourcing option we study the optimal production inventory outsourcing policy for a firm with markovian in house production capacity that faces independent stochastic demand and has the option to outsource we find very simple optimal policy forms under fairly reasonable assumptions in addition when the capacity markov process is stochastically monotone the policy parameters decrease in the firm s current capacity level under additional assumptions all these results extend to the infinite horizon and undiscounted cost cases we analyze comparative statics and the necessity of some technical conditions and discuss when the outsourcing option is more valuable

currency crises are they all the same abstract the plethora of currency crises around the world has fueled many theories on the causes of speculative attacks the first generation models focus on fiscal problems while the second generation models emphasize countercyclical policies and self fulfilling crises in the 1990s models pinpoint to financial excesses with the crisis of argentina in 2001 models of sovereign default have become popular again while the theoretical literature has emphasized variety the empirical literature has supported the one size fits all models this paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties

fiscal policy and the duration of financial crises financial systems across the world have all come under pressure due to the on going financial crisis one of the most often asked questions during a collapse is how long and how deep will the decline be as well as what policy initiatives can be employed to shorten the recession this study estimates a model of the duration of financial crises in an attempt to identify whether fiscal policy can reduce the time to recovery the results suggest that fiscal shocks which could provoke an overreaction on the part of markets tend to lengthen crisis duration significant nonlinear effects of government spending are also reported in relation to trade openness and financial openness

dynamic interdependence of sovereign credit default swaps in brics and mist countries abstractthis article examines the interactions of emerging markets sovereign credit default swaps cds using a generalized vector autoregressive framework and principal component analysis we find significant spillover effects within the two groups of emerging markets under study using the principal component analysis we show that global financial market factors are important drivers of brics and mist sovereign cds spreads variability focusing on the forecast error variance decomposition most of the spillover effects are documented among the emerging markets cds brazil and mexico contribute the largest net directional spillovers to the other emerging markets studied highlights there exist significant cds spillover effects for mist and brics countries mexico dominates the spillover effects within the mist group while brazil dominates the spillover effects within the brics group as determined by principal component analysis global financial market factors are important drivers of brics and mist sov

financial policy and speculative runs with a crawling peg argentina 1979 1981 abstract in this paper we present a model of a balance of payments crisis and examine the argentine experiment with a crawling peg between december 1978 and february 1981 the approach taken allows us to examine the evolution of a crisis when a collapse is not perfectly foreseen and yields plausible estimates of one month ahead probabilities of a collapse of the crawling peg the results suggest that the viability of an exchange rate regime depends on the consistency of exchange rate policy with domestic credit policy if the two are not consistent confidence in exchange rate policy is undermined

sharp reductions in current account deficits an empirical analysis abstract we study determinants and consequences of sharp reductions in current account imbalances reversals in low and middle income countries we pose two questions what triggers reversals and what factors explain how costly reversals are we find that both domestic variables such as the current account balance openness and the level of reserves and external variables such as terms of trade shocks us real interest rates and growth in industrial countries seem to play an important role in explaining reversals in current account imbalances we also find some evidence that countries with a less appreciated real exchange rate higher investment and more openness prior to the reversal tend to grow faster after a reversal occurs

exchange market pressure some caveats in empirical applications the exchange market pressure emp index developed by eichengreen et al 1994 is widely used as a tool to signal whether pressure on a currency is softened or warded off through monetary authorities interventions or rather a currency crisis has originated in this article we show how the index is sensitive to some assumptions behind the aggregation of the information available exchange rates interest rates and reserves especially when emerging countries are involved specifically we address the way exchange rate variations are computed and the impact of different definitions of the reserves and we question the constancy of the weights adopted these issues compound with the choice of a fixed threshold when crisis episodes are identified through the emp index as a result one should exert caution in subsequent econometric analyses where a dependent binary variable is built to identify crisis periods

do weak institutions prolong crises on the identification characteristics and duration of declines during economic slumps this paper studies periods of prolonged contractions in output per capita in a sample of 145 countries from 1950 to 2014 economic slumps are defined as abrupt interruptions of a period of growth by several regime switches slumps start with a sharp contraction along with a trend break which is followed by another switch when growth stabilizes again the paper then analyzes the correlates of these slumps focusing on the length and depth of the contraction from the beginning of the slump to its trough the results establish three new stylized facts i weak political institutions predate crises whereas political reforms tend to follow them ii the length and depth of economic declines are robustly correlated with executive constraints and ethnic heterogeneity and iii there is a robust interaction between these two variables suggesting that institutions constraining leaders are important for stabilizing growth this is particularly relevant for sub saharan africa where politics are often ethnic and decision makers are comparatively unconstrained

two cases for sand in the wheels of international finance the incompatibility of pegged exchange rates international capital mobility and national monetary autonomy is a basic postulate of open economy macroeconomies in the present environment of high capital mobility and political uncertainty even the possibility that governments may utilize their policy autonomy can defeat efforts to peg the exchange rate this leaves two possibilities one is to fix the exchange rate irrevocably through monetary unification the other is to live with floating rates either way a case can be made for throwing sand in the wheels of international finance where monetary unification is not an option this is a may to make distinct national currencies tolerable and international money and capital markets compatible with modest national autonomy in monetary and macroeconomic policy for eu counties striving to create a monetary union it is the only politically and economically feasible way of completing the transition to stage iii of the maastricht process

towards a new early warning system of financial crises abstract this paper develops a new early warning system ews model based on a multinomial logit model for predicting financial crises it is shown that commonly used ews approaches which use binomial discrete dependent variable models are subject to what we call a post crisis bias this bias arises when no distinction is made between tranquil periods when economic fundamentals are largely sound and sustainable and crisis post crisis periods when economic variables go through an adjustment process before reaching a more sustainable level or growth path we show that applying a multinomial logit model which allows distinguishing between more than two states is a valid way of solving this problem and constitutes a substantial improvement in the ability to forecast financial crises the empirical results reveal that for a set of 20 open emerging markets for the period 1993 2001 the model would have correctly predicted a large majority of crises in emerging markets

the collapse of the fixed exchange rate regime with sticky wages and imperfect substitutability between domestic and foreign bonds abstract the paper extends the recent literature on balance of payments crises by allowing real effects to be connected with them the collapse of the fixed exchange rate regime and the dynamics associated with this regime shift are studied in addition the effects of a fiscal expansion under the fixed exchange rate regime are studied taking into account the fact that the viability of the regime is policy dependent

cross hedging strategies between cds spreads and option volatility during crises abstract this paper presents a joint analysis of the term structure of credit default swap cds spreads and the implied volatility surface for five european countries from 2007 to 2012 a sample period covering both the global financial crisis gfc and the european debt crisis we analyze to which extent effective cross hedges can be performed between the credit and equity derivatives markets during these two crises we find that during a global crisis a breakdown of the relationship between credit risk and equity volatility may occur jeopardizing any cross hedging strategy which happened during the gfc this stands in sharp contrast to the more localized european debt crisis during which this fundamental relationship was preserved despite turbulent market conditions for both the cds and volatility markets

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

international reserves before and after the global crisis is there no end to hoarding we evaluate the impact of the global financial crisis gfc and recent structural changes in the patterns of hoarding international reserves ir we confirm that the determinants of ir hoarding evolve with developments in the global economy during the pre gfc period of 1999 2006 gross saving is associated with higher ir in developing and emerging markets the negative impact of outward direct investment on ir accumulation is consistent with the recent trend of diverting international assets from the international reserve account into tangible foreign assets the joneses effect lends support to the regional rivalry in hoarding ir as a motivation and commodity price volatility induces precautionary buffer hoarding during the 2007 2009 gfc period previously significant variables become insignificant or display the opposite effect probably reflecting the frantic market conditions driven by financial instability nevertheless the propensity to import and gross saving continue to display strong and even larger positive effects on ir holding the results from the 2010 2012 post gfc period are dominated by factors that had been mostly overlooked in earlier decades while the negative effect of swap agreements and the positive effect of gross saving on ir holdings are in line with our expectations we find a change in the link between outward direct investment and ir in the pre and post crisis period the macro prudential policy tends to complement ir accumulation developed countries display different demand behaviors for irs higher gross saving is associated with lower ir holding possibly reflecting high income countries tendency to deploy their savings in the global capital markets the presence of sovereign wealth funds motivates developed countries to hold a lower level of ir our predictive exercise affirms that an emerging market economy with insufficient ir holdings in 2012 tends to experience exchange rate depreciation against the u s dollar when many emerging markets were adjusted to the news of tapering quantitative easing in 2013

borrowing to defend the exchange rate and the timing and magnitude of speculative attacks abstract the paper analyses the implications for the timing and magnitude of a speculative attack on a fixed exchange rate of government borrowing to increase the stock of international reserves it is shown that such borrowing reduces the likelihood of an early collapse and increases the likelihood of an eventual collapse the magnitude of the speculative attack also increases

the exact timing of the collapse of an exchange rate regime and its impact on the relative price of traded goods as of february 28 1983 ninety four countries are classified as having a fixed exchange rate regime 38 are pegged to the u s dollar 13 to the french franc 14 to the special drawing right and 24 to different baskets of currencies the choice of a fixed exchange rate peg implies a specific monetary discipline namely monetary growth equal to the growth rate of the currency or currencies to which a country is pegged monetary policy is thus subject to an exchange rate rule rather than to either a monetary growth rule or alternatively to discretionary policy a fixed exchange rate is a specific case of an active crawling peg where the preannounced rate of change in the exchange rate is zero active crawling peg rules whereby the exchange rate is adjusted downward by a preannounced amount over a specified period of time have been practiced in various places particularly in latin america recent experiments include argentina beginning december 1978 brazil during the 1980 calendar year chile from february 1978 to june 1979 jamaica from may 1978 to may 1979 portugal from august 1977 to june 1979 and uruguay beginning october 1978 1 at times the prean

a cardan s discriminant approach to predicting currency crashes abstract this paper models large swings in exchange rates by introducing nonlinearity via the generalized normal gen distribution lye j n martin v l 1993 robust estimation nonnormalities and generalized exponential distributions journal of the american statistical association 88 261 267 as the distribution allows for bimodality a switch between modes may give rise to currency crashes a statistic known as cardan s discriminant based on the shape parameters of the gen is used to detect bimodality the cardan s discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies

bank sovereign risk spillovers in the european debt crisis this paper investigates contagion between bank risk and sovereign risk in europe over the period 2006 2011 since this period covers various stages of the banking and sovereign crisis it oers a fertile ground to analyze bank sovereign risk spillovers we de ne contagion as excess correlation i e correlation between banks and sovereigns over and above what is explained by common factors using cds spreads at the bank and at the sovereign level moreover we investigate the determinants of contagion by analyzing bank speci c as well as country speci c variables and their interaction we provide empirical evidence that various contagion channels are at work including a strong home bias in bank bond portfolios using the eba s disclosure of sovereign exposures of banks we nd that banks with a weak capital and or funding position are particularly vulnerable to risk spillovers at the country level the debt ratio is the most important driver of contagion

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

did established early warning signals predict the 2008 crises abstract over the past 60 years a voluminous literature has painstakingly developed crises theories and their associated early warning signals the hallmark of this literature is the consistency with which selected early warning signals such as the level of reserves and exchange rate appreciations are presumed to predict different types of crises across countries and time the diversity of crises theories that motivate early warning signals presents however a challenge to empirical implementations given that the true model of early warning signals is unknown omitted variable bias contaminates estimates and confidence levels when the uncertainty surrounding a particular theory has been ignored after addressing model uncertainty in early warning signal regressions using an extended version of frankel and saravelos 2012 j int econ 87 216 231 dataset we do not find a single early warning signal that alerts to all dimensions of the 2008 crisis instead distinct sets of early warning signals identify different dimensions of the crisis banking balance of payments exchange rate pressure and recession

developing an early warning system to predict currency crises abstract the purpose of this paper is to develop an early warning system to predict currency crises in this study a data set covering the period of january 1992 december 2011 of turkish economy is used and an early warning system is developed with artificial neural networks ann decision trees and logistic regression models financial pressure index fpi is an aggregated value composed of the percentage changes in dollar exchange rate gross foreign exchange reserves of the central bank and overnight interest rate in this study fpi is the dependent variable and thirty two macroeconomic indicators are the independent variables three models which are tested in turkish crisis cases have given clear signals that predicted the 1994 and 2001 crises 12 months earlier considering all three prediction model results turkey s economy is not expected to have a currency crisis ceteris paribus until the end of 2012 this study presents uniqueness in that decision support model developed in this study uses basic macroeconomic indicators to predict crises up to a year before they actually happened with an accuracy rate of approximately 95 it also ranks the leading factors of currency crisis with regard to their importance in predicting the crisis

open economy macroeconomics developments in theory and policy this paper views developments in open economy macroeconomics through the lens of the debate over european monetary unification the empirical tendency for nominal exchange rate regimes to affect the variability of nominal and real exchange rates alike can be rationalized by sticky price theories or models of asset market liquidity effects but plausible liquidity models have difficulty generating enough persistence to match the data thus the macroeconomic stabilization costs of forgoing the exchange rate realignment option seem pertinent it is argued that our theories of efficiencies due to a common currency remain unsatisfactory despite recent advances the paper concludes by reviewing theories of currency crisis

elections exchange rates and reform in latin america abstract in this paper we study the link between real exchange rate rer depreciation and elections in latin america our contribution is threefold first we employ a statistical model that takes into account the pervasive conditional heteroskedasticity found in financial data and includes a wide range of macroeconomic variables as regressors second we test whether the wave of central bank reform that swept the region has had any effect on the existence or strength of the electoral cycle in exchange rates third we test an additional hypothesis namely that financial liberalization may also be an important variable explaining changes in electoral effects on the real exchange rate in a panel of 9 latin american countries with available macroeconomic data and a history of exogenous election dates we confirm the previous findings that real depreciation intensifies after elections even when modeling the significant conditional heteroskedasticity in these data we also show for the first time in the literature that post election exchange rates are significantly less predictable we go on to test whether central bank reform has influenced the way in which elections affect the rer in latin america if reform has been effective at reducing political manipulation of the exchange rate then any relationship we see between elections and the rer before central bank reform should be mitigated in the post reform era we find that the relationship disappears after reform and that post reform real exchange rates are also significantly less volatile finally we show that financial liberalization seems to have a stronger effect on the conditional variance of the rer than does central bank reform but reform has a stronger impact on the conditional mean

crash risk of the euro in the sovereign debt crisis of 2009 2010 the economic political instability of a country which is tied to its credit risk often leads to sharp depreciation and heightened volatility in its currency this paper shows that not only the creditworthiness of the euro area countries with weaker fiscal positions but also that of the member countries with more sound fiscal positions are important determinants of the deep out of the money euro put option prices which embedded information on the euro crash risk during the sovereign debt crisis of 2009 2010 we also find evidence of information flow from the sovereign credit default swap market to the currency option market during the crisis

dual sourcing in the age of near shoring trading off stochastic capacity limitations and long lead times abstract we model a periodic review inventory system with non stationary stochastic demand in which a manufacturer is procuring a component from two available supply sources the faster supply source is modeled as stochastic capacitated with immediate delivery while the slower supply source is modeled as uncapacitated with a longer fixed lead time the manufacturer s objective is to choose how the order should be split between the two supply sources in each period where the slower supply source is used to compensate for the supply capacity unavailability of the faster supply source this is different from the conventional dual sourcing problem and motivated by the new reality of near shoring options we derive the optimal dynamic programming formulation that minimizes the total expected inventory holding and backorder costs over a finite planning horizon and show that the optimal policy is relatively complex we extend our study by developing an extended myopic two level base stock policy and we show numerically that it provides a very close estimate of the optimal costs numerical results reveal the benefits of dual sourcing under near shoring where we point out that in most cases the manufacturer should develop a hybrid procurement strategy taking advantage of both supply sources to minimize its expected total cost

an econometric analysis of some models for constructed binary time series macroeconometric and financial researchers often use binary data constructed in a way that creates serial dependence we show that this dependence can be allowed for if the binary states are treated as markov processes in addition the methods of construction ensure that certain sequences are never observed in the constructed data together these features make it difficult to utilize static and dynamic probit models we develop modeling methods that respect the markov process nature of constructed binary data and explicitly deals with censoring constraints an application is provided that investigates the relation between the business cycle and the yield spread

volatility spillovers and connectedness among credit default swap sector indexes this article studies volatility spill over effects and market connectedness using daily data of credit default swap spreads for u s companies over a period from 2007 to 2012 we quantify volatilit