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Currency Crises and Monetary Policy: A Study on Advanced and Emerging Economies

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Currency Crises and Monetary Policy: A Study on Advanced and Emerging Economies Sylvester Eijffinger and Bilge Karatas Tilburg University CIGI, VERC and University of ... – PowerPoint PPT presentation

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Title: Currency Crises and Monetary Policy: A Study on Advanced and Emerging Economies


1
Currency Crises and Monetary Policy A Study on
Advanced and Emerging Economies
  • Sylvester Eijffinger and Bilge Karatas
  • Tilburg University
  • CIGI, VERC and University of Tasmania Conference
  • October 04, 2011

2
Outline
  • Introduction
  • Theoretical Models in Currency Crises
  • Monetary Policy Response to Currency
  • Empirical Analysis
  • Methodology and Data
  • Pooled OLS Results
  • System GMM Results
  • Conclusion

3
Introduction Currency Crisis
  • ...an episode in which the exchange rate
    depreciates substantially during a short period
    of time (Burnside et al., 2007)
  • Theoretical Models in Crisis Explanation
  • First Generation Models Balance Sheet
    Imbalances of the Government (Krugman, 1979)
  • Second Generation Models Self-fulfilling
    Expectations (Obstfeld, 1994)
  • Third Generation Models Balance Sheet
    Imbalances of the Private Sector (Krugman, 1999
    Chang and Velasco, 1998)

4
Introduction Monetary Policy Response
  • Conventional Wisdom The behavior of exchange
    rate is explained with asset market conditions.
    Tighter monetary policy followed today leads to a
    stronger currency today IS THAT THE CASE DURING
    CRISIS TIMES?
  • Empirical Studies
  • Goldfajn Gupta (2003) Tight monetary policy
    facilitates the reversal of the real exchange
    rate. In contrast, in periods of twin crises the
    effectiveness of tight monetary policy decreases.
  • Kraay (2003) There is little evidence that
    monetary policy has any positive or negative
    effect on exchange rate.
  • Eijffinger Goderis (2008) Focusing on the
    third generation vulnerabilities the study
    concludes that tight monetary policy depreciates
    the exchange rates following currency crisis.

5
Introduction Research Question and Motivation
  • Research Question Do Emerging and Advanced
    Economies Need Different Monetary Policies
    Following a Currency Crisis?
  • Various economic vulnerabilities preceding and
    following the currency crisis in emerging and
    advanced economies motivated a separate analysis
    for these groups of economies.

6
Empirical Analysis Methodology and Data
  • Years 1986 2009
  • 24 Economies 9 Advanced and 15 Emerging.
  • Crisis Period Identification (Eijffinger and
    Goderis, 2008) 35 crisis periods
  • Starting month of the currency crisis is the
    month with the large depreciation of the nominal
    exchange rates following the period of moderately
    stable exchange rates.
  • Ending month of the currency crisis is the first
    month after the start in which speculative
    pressures have substantially diminished compared
    to earlier peaks.

7
Empirical Analysis Crisis Periods
8
Empirical Analysis Methodology and Data
  • Change in the Nominal Exchange
    Rates
  • Change in Monetary Policy
    Money Market Interest Rates
  • Episode-Specific Fundamentals
  • Interaction terms Monetary
    Policy X Fundamentals

9
Empirical Analysis Episode Specific Fundamentals
  • From Eijffinger and Goderis (2008)
  • Deviation of the Real Per-Capita GDP
  • Real Exchange Rate Overvaluation
  • Corporate Short-term Debt to Total Assets
  • Institutional Quality
  • Capital Account Openness
  • From Kaminsky (2006)
  • Fiscal Position
  • Stock Prices
  • Short-term External Debt
  • Current Account Position
  • Central Bank Transparency

10
Empirical Analysis Pooled OLS Results
11
Emerging Economies Monetary Policy
Ambiguous Overvaluation
Low Inst. Quality Fall in Stock Prices Low CB
Transparency MP X Debt to Assets MP X KA
Openness MP X Fiscal Deficit MP X Stock Prices MP
X CB Transparency Advanced Economies Monetary
Policy Ambiguous CA Deficit MP X CA Deficit MP X
Fiscal Deficit MP X Stock Prices
Depreciation
Depreciation
12
Empirical Analysis System GMM Estimation Results
13
  • Emerging Economies
  • Monetary Policy Ambiguous
  • Fall in Stock Prices
  • MP X Debt to Assets
  • MP X Stock Prices
  • MP X CB Trans.
  • Advanced Economies
  • Monetary Policy Ambiguous
  • Deviation GDP Growth
  • CA Deficit
  • Overvaluation
  • Low Inst. Quality
  • MP X CA Deficit

Depreciation
Depreciation
14
Conclusions
  • Tight monetary policys ineffectiveness in
    exchange rate stabilization is an emerging
    economy problem
  • Financial and corporate sector problems Tight
    policy Depreciation of exchange rates.
  • Transparency of central banking has a crucial
    role in policy implementation.
  • Advanced Economies Excluding 2008 financial
    crisis, tight policy stabilizes exchange rates.

15
Discussion
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