Exchange rates

Transmission of Fed tapering news to emerging markets

Joshua Aizenman, Mahir Binici, Michael M Hutchison, 4 April 2014

In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.

The credit cycle and LatAm vulnerabilities

Julián Caballero, Ugo Panizza, Andrew Powell, 2 April 2014

In recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. This column argues that these phenomena are linked, and may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess. There is no systematic information on firms’ currency mismatches and hedging activities, and none that includes those of subsidiaries that may be located in other jurisdictions, preventing an accurate analysis of the true risks.

Managing the exchange rate

Atish R Ghosh, Jonathan D Ostry, Mahvash Saeed Qureshi, 2 April 2014

In a world of volatile capital flows, emerging markets are increasingly resorting to managing their exchange rates. But does this strategy increase their susceptibility to crisis? This column argues that while intermediate regimes as a class are the most susceptible to crises, ‘managed floats’ – a subclass within such regimes – behave much more like pure floats, with significantly lower risks and fewer crises. ‘Managed floating’, however, is a nebulous concept; a characterisation of more crisis prone regimes suggests that it is not the degree of exchange rate management alone, but the way the exchange rate is managed, that matters. Greater against-the-wind intervention by the central bank to prevent currency overvaluation reduces, while greater intervention to defend an overvalued currency raises, the crisis likelihood.

Love it or hate it... the dollar's here to stay

Eswar Prasad, 29 March 2014

Eswar Prasad talks to Viv Davies about his recent book, ‘The Dollar Trap: How the US dollar tightened its grip on global finance’, which examines how, paradoxically, in light of the financial crisis, the dollar continues to play a central role in the world economy and why it will remain the cornerstone of global finance for the foreseeable future. They also discuss the current frameworks for international economic cooperation as well as currency wars, unconventional monetary policy and the prospects for the renminbi becoming the world's reserve currency. The interview was recorded in London in March 2014.

The Global Crisis and East Asian currency misalignment

Eiji Ogawa, Zhiqian Wang, 19 January 2014

Since the East Asian financial crisis of 1997, the emphasis on regional monetary cooperation has grown. This column discusses recent research into intra-regional exchange rate misalignments. In the aftermath of the Global Financial Crisis, investors in the US and Europe withdrew from emerging markets, causing a depreciation of emerging-market currencies against the US dollar. At the same time, the appreciation of the Japanese yen – fuelled in part by intra-regional capital flows – has increased the misalignment of intra-regional exchange rates.

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