IMF-Related Announcements, Fundamentals, and Creditor Moral Hazard: A Case Study of Indonesia

Previous tests of creditor moral hazard cannot distinguish between two types of investor behavior: expectations of implicit guarantees or better future economic fundamentals due to a prospective IMF program. The novelty of our approach lies in the inclusion of the forward foreign exchange rate in the empirical tests of creditor moral hazard, which reflects investors’ expectations about the country’s future fundamentals and allows us to separate the effects of fundamentals from those of moral hazard. Using Indonesian financial markets as a case study, we first conduct tests of creditor moral hazard in the Indonesian bond and stock markets. Then, we use the forward exchange rate to confirm the interpretation of the bond and stock market results. Our results show that IMF-program related news, especially, the announcement of program negotiations, brings about higher stock returns and lower bond spreads, even though the bath sells at a forward discount on the same day. These results suggest creditor moral hazard in the Indonesian bond and equity markets.http://deepblue.lib.umich.edu/bitstream/2027.42/40066/3/wp680.pd

Community analysis of global financial markets

We analyze the daily returns of stock market indices and currencies of 56 countries over the period of 2002–2012. We build a network model consisting of two layers, one being the stock market indices and the other the foreign exchange markets. Synchronous and lagged correlations are used as measures of connectivity and causality among different parts of the global economic system for two different time intervals: non-crisis (2002–2006) and crisis (2007–2012) periods. We study community formations within the network to understand the influences and vulnerabilities of specific countries or groups of countries. We observe different behavior of the cross correlations and communities for crisis vs. non-crisis periods. For example, the overall correlation of stock markets increases during crisis while the overall correlation in the foreign exchange market and the correlation between stock and foreign exchange markets decrease, which leads to different community structures. We observe that the euro, while being central during the relatively calm period, loses its dominant role during crisis. Furthermore we discover that the troubled Eurozone countries, Portugal, Italy, Greece and Spain, form their own cluster during the crisis period.Published versio

Sterilization, monetary policy, and global financial integration

This paper investigates the changing pattern and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net balance of payments inflows, across countries and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.Emerging markets ; Bank reserves ; International finance

Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)

This paper suggests that a new approach is needed in order to identify the causes of the East Asian financial crises and that this new approach might be fruitful in reassessing the analyses and theories of financial crises in emerging economies. The first part of the paper presents a new empirical analysis of the state of fundamentals in East Asia before the crises. It suggests that the relevant fundamentals were both non-conventional and "intermediate" (or not "bad" enough to trigger the crises by themselves). Fundamentals were also different from those preceding previous turmoils in the 1990s, such as the ERM crisis in 1992-1993 and the Mexican crisis in 1994-1995. The second part highlights that existing theoretical models of currency crises miss some important points. Even second generation models, which stress self-fulfilling expectations and which acknowledge that crises might appear against the backdrop of non-conventional and intermediate fundamentals, explain only the role of fundamentals in relation to private expectations. But they do not explain how can it be that a shift in private agents' expectations turns out into a financial crisis. The third part suggests that the current process of globalization exacerbates failures in international capital markets and impinges upon capital flows and the pace and order of financial liberalization in emerging economies, increasing therefore uncertainty and rendering large domestic vulnerabilities. It also highlights how financial globalization was related to the East Asian crises. The main conclusion is that intermediate non-conventional fundamentals, shifts in private agents' expectations and financial globalization were arguably the main factors of the East Asian crisis. Therefore, in order to prevent future financial crises, governments in emerging economies should try to exit crises zones through improving their fundamentals, to proceed carefully with financial liberalization, to implement some kind of capital controls and to urge for the establishment of a new global financial architecture.