Speculative Attacks or Economic Fundamentals: Evidence from the Asian Currency Crisis

This paper argues that what led to the Asian financial crisis was a fatal combination of several self-reinforcing factors including external sector weaknesses, fragility in domestic financial markets due to inadequately administered financial liberalisation, loss of confidence, and short-term capital flows, maturing within less than a year and denominated in unhedged dollars. Some of these factors were country-specific while others were common to the entire region. Asia\u27s financial crisis will almost certainly lead to important changes in the international financial system, as countries try to find an appropriate balance between the benefits from gaining access to intentional capital flows and the potential for instability and ohter risks that also seem to be much greater in a world of large and highly mobile capital movements. The paper discusses important lessons from the crisis

Does Exchange Rate Variability Depress Trade Flows ? Evidence From Error Correction Models

This paper examines the impact of exchange rate volatility on the trade flows of the G-7 countries in the context of a multivariate error-correction model. The error-correction models do not show any sign of parameter instability. The results indicate that the exchange rate volatility has a significant negative impact on the volume of exports in each of the G-7 countries. Assuming market participants are risk averse, these results imply that exchange rate uncertainty causes them to reduce their activities, change prices, or shift sources of demand and supply in order to minimize their exposure to the effects of exchange rate volatility. This, in turn, can change the distribution of output across many sectors in these countries. It is quite possible that the surprisingly weak relationship between trade flows and exchange rate volatility reported in several previous studies are due to insufficient attention to the stochastic properties of the relevant time series

(WP 2013-07) Terms of Trade Shocks and Private Savings in the Developing Countries

Economic agents in the developing countries are subject to tight credit constraints, which are more pronounced during bad state of nature. Thus, adverse shocks to commodity prices in the world market can force them to reduce savings by a larger amount than they would otherwise have. Empirical analysis using a dynamic GMM model and data from 45 developing countries confirm that most of the determinants of savings identified in the literature also apply to the developing countries. The transitory component in the terms of trade have a larger positive impact than the permanent component. This reflects the lack of access to foreign borrowing. Although the impact of terms of trade shocks is found to be asymmetric, the magnitude of the impact appears to be relatively small. The results are robust for alternative estimators, determinants and country groupings

(WP 2011-03) State Government Revenue and Expenditures: A Bootstrap Panel Analysis

The current fiscal crises that most states in the United States are facing are generally the result of a severe macroeconomic downturn combined with a limited ability of the states to respond to such shocks. States are facing increased demand for public services at the same time revenue is falling. In this context, this paper explores the issue of temporal priority between government expenditures and revenue at the state and local levels. The results show that there is no uniform relationship between government revenue and spending across different states in the US. In fact, about 40% of the states show the absence of any temporal relationship between these two variables. This is quite revealing given the current state of the debate in the academic and policy-making circle. A support for the tax-spend hypothesis is found in 18% of the states while the spend-tax hypothesis is prevalent in another 16%. In 26% of the states, the revenue and expenditures decisions are jointly determined by the government

(WP 2011-06) Do Stock Market Risk Premium Respond to Consumer Confidence?

During the 2007-9 Great Recession, the risk premium associated with U.S. stocks sharply increased and has since remained significantly higher compared to its range during the last 40 years. The increase in the equity risk premium has led many analysts to believe that risk aversion among stock investors has moved to a permanently higher range in recent years. Our empirical findings show that the recent increase in the equity risk premium primarily reflects a temporary collapse in consumer confidence. As long as the consumer confidence in the sustainability of economic recovery remains low, today\u27s elevated risk premium would persist. Once the confidence level starts to recover - as it has done after every recession since the 1960s - the required return among stock market investors should also diminish