banking crises and short and medium term output losses in emerging and developing countries the role of structural and policy variables summary the aim of this paper is to assess the dynamic impact of banking crises on output for a panel of developing economies using an unbalanced panel of 159 countries from 1970 to 2006 the paper shows that banking crises produce significant output losses output losses are larger for relatively richer economies characterized by a higher level of financial deepening and larger current account imbalances flexible exchange rates fiscal and monetary policy and liquidity support policies have been found to attenuate the effect of the crises

stabilization policy in a currency union abstract we show that the monetary authority of a currency union chooses to do nothing in the face of an asymmetric shock generating inefficiently high inflation and employment fluctuations in the member countries moreover adjustment is equivalent to that under a mckinnon rule

chronicle of currency collapses re examining the effects on output abstract the impact of currency collapses i e large nominal depreciations or devaluations on real output remains unsettled in the empirical macroeconomic literature this paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies over the period 1960 2006 we provide estimates of how these episodes affect growth and output trend our main finding is that currency collapses are associated with a permanent output loss relative to trend which is estimated to range between 2 and 6 of gdp however we show that such losses tend to materialize before the drop in the value of the currency which suggests that the costs of a currency crash largely stem from the factors leading to it taken on its own i e ceteris paribus we find that currency collapses tend to have a positive effect on output more generally we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction and that positive growth rates in the years that follow such episodes are the norm finally we show that the persistence of the crash matters i e one time events induce exchange rate and output dynamics that differ from consecutive episodes

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

does terrorism affect the stock bond covariance evidence from european countries using daily stock and bond returns data from four european countries france germany spain and great britain that have been the victims of significant terrorist activity this study addresses the issue of whether transnational and or domestic terrorist attacks have affected in any significant manner the time varying stock bond covariance their returns and their variances stock and bond markets can be influenced and determined not only by the usual array of macroeconomic factors but also by security shocks such as a terrorist incident that have the potential to affect investors sentiment and portfolio allocation decisions the issue at hand is addressed using a var p garch 1 1 in mean model and the results reported herein indicate that terrorist attacks trigger a flight to safety effect primarily in france and germany and to a smaller degree in great britain and spain

when credit bites back using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle relative to typical recessions financial crisis recessions are costlier and more credit intensive expansions tend to be followed by deeper recessions in financial crises or otherwise and slower recoveries we use local projection methods to condition on a broad set of macro economic controls to study how past credit accumulation impacts key macro economic variables such as output investment lending interest rates and inflation the facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle

a model of financial crises in emerging markets recent events in mexico asia russia and brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive not too long ago the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates but this first generation view pioneered by krugman 1979 has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent and as obstfeld 1994 has argued currency crises have sometimes occurred even though central banks had more than enough resources to prevent them witness much of europe in the early 1990s obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large this new perspective implied that crises could be driven by self fulfilling expectations since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained but obstfeld s emphasis on mounting unemployment and domestic recession while appropriate for the erm 1992 crisis was at odds with the facts in mexico in 1994 and east asia in 1997 asian

do high interest rates defend currencies during speculative attacks new evidence kraay kraay a 2003 do high interest rates defend currencies during speculative attacks journal of international economics 59 297 321 documents the lack of any systematic association between monetary policy and the outcome of a speculative attack this paper revisits kraay s work and modifies it by introducing an improved measure of monetary policy and an additional country specific fundamental short term corporate debt to capture balance sheet vulnerabilities emphasized by the recent currency crises literature the results show that for low levels of short term corporate debt raising interest rates lowers the probability of a successful attack this effect decreases and eventually reverses for higher levels of debt these findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises

to intervene or not to intervene monetary policy and the costs of currency crises abstract in case of speculative attacks the central banks decisions to intervene or not to intervene seem to play an important role for the economic costs of currency crises the central bank can either abstain from intervening or start an intervention which in turn can be successful or unsuccessful therefore an adequate analysis of the costs of currency crises has to take into account three different types of currency crises i an immediate depreciation without any central bank interventions ii a successful defense and iii an unsuccessful attempt to defend the exchange rate we find that the decision of the central bank to intervene or to remain passive is risky if the central bank intervenes and succeeds she can achieve the best growth performance on average however if the interventions are not maintained and the currency depreciates the subsequent output loss is particularly severe abstaining from an intervention yields a scenario with a relatively small drop in output giving in to a speculative attack rather than trying to fight it can thus be a suitable option for a risk averse central bank

a fundamental asymmetry of asymmetric shocks a simple n country specific factor type model with imperfectly mobile labour is developed it is shown that the effects of country specific productivity shocks hitting a small country have fundamentally asymmetric effects a positive shock will be accommodated by a moderate wage increase and sizeable in migration whereas a negative shock will be accommodated by a significant decrease in wages and moderate out migration it is argued that the results of the model are consistent with the recent irish experience the welfare effects of small economic fluctuations are also discussed c 2002 elsevier b v all rights reserved

terrorist attacks analyst sentiment and earnings forecasts we examine whether exogenous and extremely negative events such as terrorist attacks and mass shootings influence the sentiment and forecasts of sell side equity analysts we find that analysts w

terrorism and its impact on the cost of debt abstract we extend the literature on the costs of terrorism by examining its long term impact on financial markets an underdeveloped strand of research within the terrorism construct specifically we look at its effect on the sovereign risk of 102 countries a much broader sample than examined before which forms the basis of the cost of debt in those countries postulating that it results in a lower credit rating and that this impact is more pronounced in developing as opposed to developed markets in operationalizing the risk of terrorism we utilize the institute for economics and peace s global terrorism index the most comprehensive index constructed to date which incorporates both the economic and social dimensions of terrorism and is based on the global terrorism database covering 104 000 documented incidents the results of the study support the hypothesis that terrorism results in a higher cost of debt for sovereigns and by extension firms in impacted countries in fact a two point increase in terrorism on the utilized 10 point scale on average results in a half notch reduction in a sovereign s credit rating roughly equivalent to a change in outlook furthermore this impact is more pronounced in developing markets where we find that a comparable two point increase in terrorism on average results in an entire notch downgrade in the sovereign credit rating e g from bb to bb finally we find that our model demonstrates predictive power on an out of sample basis and as such could be useful for investors seeking to construct more efficient diversified asset portfolios

cities under stress this paper studies the effect of terrorist attacks on the internal structure of cities we develop an urban framework with capital structures suitable for the study of this question and analyze the long and short term implications of this type of events in the long run the analysis shows that a terrorist attack will affect urban structure only modestly relative to the potentially large decrease in the level of economic activity in the city land rents will not decline at all locations in the short run agglomeration forces will amplify the effect of the original destruction and will reduce urban economic activity temporarily

the open society assesses its enemies shocks disasters and terrorist attacks abstract this paper conducts a systematic investigation of the incidence and economic costs of terrorist attacks at the country level we use newly assembled datasets on terrorist attacks natural disasters and currency crises to answer three different questions what are the determinants of terrorism is there an output cost following a terrorist attack and is that cost larger or smaller in the case of democracies we find that rich countries are the most prone to suffer attacks while democracies are if anything less vulnerable than other countries the cost to output of a terrorist attack is quantitatively small and closely associated with the occurrence of an event rather than the number of casualties finally we find robust evidence that a terrorist attack imposes a lower output cost the more democratic a country is

defending against speculative attacks it is risky but it can pay off abstract while currency crises are typically considered to be painful and costly events a closer look reveals that economic developments after a speculative attack differ considerably monetary authorities can play a central role in determining the economic course and costs of currency crises they have to decide whether to defend or not to defend the domestic currency giving rise to three different types of crises i an immediate depreciation if the central bank does not intervene and either ii a successful defense or iii an unsuccessful defense in the case of an intervention we find that a central bank has two options to mitigate the costs of speculative attacks namely an immediate depreciation and a successful defense if a central bank intervenes she might be able to stabilize the exchange rate only temporarily and risks to ultimately fail facing the worst of the three scenarios with the highest economic costs

behavior of output during currency crises abstract this paper documents the behavior of output and its association with other macroeconomic variables in 195 episodes of currency crises in developing countries during 1970 2000 we find that about 60 of the crises are contractionary while the rest are expansionary crises are one and a half times more likely to be contractionary in emerging markets than in other developing economies the number of contractionary crises or their severity does not increase in the 1990s economies which experience capital inflows in the years prior to the crisis or an increase in external debt burden during the crisis are more likely to slow down during crises while those with restrictions on capital flows prior to the crisis or are more open to international trade are less likely to do so the results are robust to different ways of measuring changes in output during crises

delaying the inevitable interest rate defense and balance of payments crises the classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle in practice however central banks typically defend pegs aggressively by raising short term interest rates this paper analyzes the feasibility and optimality of raising interest rates to delay a potential bop crisis interest rate policy works through two distinct channels by raising demand for domestic interest bearing liquid assets higher interest rates tend to delay the crisis higher interest rates however increase public debt service and imply higher future inflation which tends to bring forward the crisis we show that under certain conditions it is feasible to delay the crisis but raising interest rates beyond a certain point may actually hasten the crisis a similar nonmonotonic relationship emerges between welfare and the increase in interest rates it is thus optimal to engage in some active interest rate defense but only up to a certain point i

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

how bad are twins output costs of currency and banking crises we investigate the output effects of banking and currency crises in emerging markets focusing on whether twin crises entail especially large losses recent literature emphasizes the costs of financial crises and suggests that twin crises are particularly damaging to the real economy using a panel data set for 1975 97 we find that currency banking crises are very costly reducing output by about 5 8 8 10 over a 2 4 year period the cumulative loss of both types of crises is therefore very large we do not find however additional feedbacks or interactive effects associated with twin crises further damaging the economy

currency crises and monetary policy in an economy with credit constraints 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

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

when is it optimal to abandon a fixed exchange rate the influential krugman flood garber kfg model of balance of payment crises assumes that a fixed exchange rate is abandoned if and only if international reserves reach a critical threshold value from a positive standpoint the kfg rule is at odds with many episodes in which the central bank has plenty of international reserves at the time of abandonment we study the optimal exit policy and show that from a normative standpoint the kfg rule is generally suboptimal we consider a model in which the fixed exchange rate regime has become unsustainable due to an unexpected increase in government spending we show that when there are no exit costs it is optimal to abandon immediately when there are exit costs the optimal abandonment time is a decreasing function of the size of the fiscal shock for large fiscal shocks immediate abandonment is optimal our model is consistent with evidence suggesting that many countries exit fixed exchange rate regimes with still plenty of international reserves in the central bank s vault copyright 2008 wiley blackwell

the emergence of migration theory and a suggested new direction abstract the literature on internal labour migration is surveyed using a fourfold taxonomic scheme the potential migrant as presented in the existing literature can be viewed as a supplier of labour an investor in human capital and a consumer of regional amenities such as public goods the paper develops a fourth approach which treats the household rather than the individual as the migrating unit and which views the potential migrant as a producer of home produced commodities the continuities as well as the contrasts between the four approaches are discussed in the paper

recovery from a currency crisis some stylized facts abstract using a comprehensive data set of over 100 developing countries this paper examines how economies recover from a currency crisis some of the regularities found are listed below first it takes less than 3 years for the gdp growth rate to fully recover its tranquil period average the level of gdp however remains permanently below its initial trend suggesting that the shocks underlying a crisis are persistent second the credit crunch problem lasts much longer than the reduction in the gdp growth rate third the pre crisis credit expansion and reserve inadequacy which have been widely recognized as the main causes of a crisis also are closely related to the extent of the post crisis recession fourth crisis episodes that are caused mainly by illiquidity rather than by insolvency tend to exhibit a sharp recovery

the impact of terrorism on financial markets an empirical study the main focus of this paper is to previous termstudynext term empirically the previous termimpact of terrorismnext term on the behavior of stock bond and commodity previous termmarkets next term we consider terrorist events that took place in 25 countries over an 11 year time period and implement our analysis using different methods an event previous termstudynext term approach a non parametric methodology and a filtered garch evt approach in addition we compare the effect of terrorist attacks on previous termfinancial markets with the impactnext term of other extreme events such as previous termfinancialnext term crashes and natural catastrophes the results of our analysis show that a non parametric approach is the most appropriate method among the three for analyzing the previous termimpact of terrorism on financial markets next term we demonstrate the robustness of this method when interest rates equity previous termmarketnext term integration spillover and contemporaneous effects are controlled we show how the results of this approach can be used for investors portfolio diversification strategies against previous termterrorismnext term risk

macroeconomic consequences of terror theory and the case of israel abstract this paper analyzes the effect of terror on the economy terror endangers life such that the value of the future relative to the present is reduced hence due to a rise in terror activity investment goes down and in the long run income and consumption go down as well governments can offset terror by putting tax revenues into the production of security facing a tide in terror a government that acts optimally increases the proportion of output spent on defense but does not fully offset the tide thus when terror peaks the long run equilibrium with an optimizing government is of lower output and welfare next we show that this theory of terror and the economy helps to understand changes in trend and business cycle of the israeli economy the estimates show that terror has a large impact on the aggregate economy continued terror at the level of the death toll by about the same size as due to car accidents is expected to decrease annual consumption per capita by about 5 in 2004 had israel not suffered from terror during the last 3 years we estimate that the output per capita would have been 10 higher than it is today

output costs currency crises and interest rate defence of a peg central banks typically raise short term interest rates to defend currency pegs higher interest rates however often lead to a credit crunch and an output contraction we model this trade off in an optimising first generation model in which the crisis may be delayed but is ultimately inevitable we show that higher interest rates may delay the crisis but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect the optimal interest rate defence involves setting high interest rates relative to the no defence case both before and at the moment of the crisis

is economic recovery a myth robust estimation of impulse responses we estimate the impulse response function irf of gdp to a banking crisis using an extension of the local projections method we demonstrate that though robust to misspecifications of the data generating process this method suffers from a hitherto unnoticed bias which increases with the forecast horizon we propose a correction to this bias and show through simulations that it works well applying our corrected local projections estimator to the data from a panel of 99 countries observed between 1974 and 2001 we find that an average banking crisis yields a gdp loss of just under 10 in 10 years with little sign of recovery like the original local projections method our extension of it is widely applicable

the effects of terrorism and war on the oil price stock index relationship abstract the effects war and terrorism have on the covariance between oil prices and the indices of four major stock markets the american s p500 the european dax cac40 and ftse100 using non linear bekk garch type models are investigated the findings indicate that the covariance between stock and oil returns is affected by war a tentative explanation is that the two wars examined here predispose investors and market agents for more profound and longer lasting effects on global markets on the other hand terrorist incidents that are one off unanticipated security shocks only the co movement between cac40 dax and oil returns is affected and no significant impact is observed in the relationship between the s p500 ftse100 and oil returns this difference in the reaction may tentatively be interpreted as indicating that the latter are more efficient in absorbing the impact of terrorist attacks

what are the categories of geopolitical risks that could drive oil prices higher acts or threats abstract this study characterizes the oil market as a nonlinear switching phenomenon and examines its dynamics in response to changes in geopolitical risks over low and high risk scenarios we separate the shocks due to geopolitical acts from those due to geopolitical threats to address whether the serious effects of geopolitical risks are mostly due to increased threats of adverse events or to their realization as acts while we find the acts to generate a positive and strong impact on oil price dynamics the effect of threats appears to be moderate or non significant imperfect information in the oil price determination the history of oil supply disruptions emanating from geopolitical events the continued rise in populism in the world oil market volatility multifractility and the time varying degree of weak form efficiency have been advanced to explain the unforeseen responses of oil prices to geopolitical threats to accommodate recent oil related events we construct a composite geopolitical risk indicator by accounting for contemporaneous sources of geopolitical risks namely global trade tensions us china relation risks us iran tensions saudi arabia s uncertainty and venezuela s crisis the combined effects have an outsized impact on oil prices

on the effect of devaluation during stabilization programs in ldcs this paper is a cross section study of the effect of real devaluations on capacity utilization during stabilization programs in ldcs it finds that such devaluations had a significant negative effect on output as predicted in many recent papers this was not because devaluation caused a rise in aggregate saving but more because of a sharp contraction in investment external factors such as terms of trade and the capacity to import had a significant positive impact while monetary and fiscal policy played only a minor role copyright 1992 by mit press

a model of crises in emerging markets this paper presents a perfect foresight model of speculative attacks on emerging markets credit constrained governments are assumed to have two objectives to accumulate liquid assets in order to self insure against shocks to national consumption and to insure poorly regulated domestic financial markets this policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities the model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks the model suggests that a common shock generated capital inflows to emerging markets in asia and latin america after 1989

an interest rate defense of a fixed exchange rate defending a government s exchange rate commitment with active interest rate policy is not an option in first generation models of speculative attacks in those models the interest rate is the passive reflection of currency depreciation expectations in this paper we show how to adapt the first generation framework to allow for an interest rate defense it is shown that increasing domestic currency interest rate before the attack makes domestic assets more attractive according to an asset substitution effect but weakens the domestic currency by increasing the government s fiscal liabilities as a result an interest rate defense can be successful only conditional on sound fiscal policy

economic costs of alternative monetary policy responses to speculative currency attacks abstract the outcome of a speculative attack on the foreign exchange rate can be classified into three cases i immediate depreciation of the nominal exchange rate ii successful defense or iii failed defense this paper explores which of these outcomes yields the lowest cost in terms of output and unemployment in the short and medium run ex ante the outcome of a speculative attack is uncertain therefore the appropriate response of monetary authorities to a speculative attack depends on the cost of an immediate depreciation compared with that of the expected outcome of a currency defense our empirical analysis focuses on a sample of 73 emerging and developing countries over the 1960 2011 period our results indicate that an immediate depreciation is the policy response that is associated with a lower expected output loss and unemployment in the short run and it tends to be expansionary in the medium run a defense if successful entails insignificant costs in the short run but unlike an immediate depreciation a successful defense is not expansionary in the medium run if a defense fails large output losses and an increase in unemployment ensue at least in the short run

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

the macroeconomic consequences of terrorism abstract we perform an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence our analysis is based on a rich unbalanced panel data set with annual observations on 177 countries from 1968 to 2000 which brings together information from the penn world table data set the iterate data set for terrorist events and data sets of external and internal conflict we explore these data with cross sectional and panel growth regression analysis and a structural var model we find that on average the incidence of terrorism may have an economically significant negative effect on growth albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict as well terrorism is associated with a redirection of economic activity away from investment spending and towards government spending however our investigation also suggests important differences both regarding the incidence and the economic consequences of terrorism among different sets of countries in oecd economies in particular terrorist incidents are considerably more frequent than in other nations but the negative influence of these incidents on growth is smaller

do high interest rates defend currencies during speculative attacks abstract do high interest rates defend currencies during speculative attacks or do they have the perverse effect of increasing the probability of a devaluation of the currency under attack drawing on evidence from a large sample of speculative attacks in developed and developing economies this paper argues that the answer to both questions is no in particular this paper documents a striking lack of any systematic association whatsoever between interest rates and the outcome of speculative attacks the lack of clear empirical evidence on the effects of high interest rates during speculative attacks mirrors the theoretical ambiguities on this issue

the price of terror the effects of terrorism on stock market returns and volatility abstract in this paper we investigate the effects of terrorism on the financial markets evidence from six different financial markets shows that terror has a significant impact on both stock markets and the stock market volatility and the magnitude of these effects are larger in emerging markets

currency crises and monetary policy a study on advanced and emerging economies the studies regarding the appropriate monetary policy response in defending the domestic currency following a currency crisis do not gather around a robust answer this study tries to emphasize the notion that there is no single policy applicable for all currency crises happened and happening in the global world the approach of the study is presenting empirical evidence by focusing separately on the advanced and emerging economies and proving that the monetary policy response for the emerging economies should be different from the advanced economies depending mainly on the vulnerabilities of these economies preceding and during the crisis periods the study includes twenty four economies in which fifteen of them are emerging and nine of them are advanced for the crisis periods between 1986 and 2009 the main finding of the study is that the tight monetary policy is effective in the advanced economies and detrimental in the emerging economies faced financial turbulence the monetary policy has no significance in recent crisis episodes both for advanced and emerging economies advanced economies besides having more independent central banking lower country riskiness and almost no default history mainly have second generation model weaknesses which cause the increased interest rates to be successful in stabilizing the exchange rates for the emerging economies the third generation model weaknesses play a major role together with the first generation model vulnerabilities thus the major policy implication follows that the policy makers should take into account the economic fragilities during the crisis in implementing the monetary policy