The Business Cycles of Balance-of-Payment Crises: A Revision of Mundellan Framework

In his seminal 1960 article Robert Mundell proposed a model of balance-of-payments crises in which confidence in the continuation of a currency peg depended on the observed holdings of central bank foreign reserves. We examine the implications of a reformulation of this view from the perspective of an equilibrium business cycle model in which the probability of devaluation is an endogenous variable conditioned on foreign reserves. The model explains some business cycle regularities of exchange-rate-based stabilizations while also producing devaluation probabilities that capture some features of devaluation probabilities estimated in the data. The analysis aims to explain both the real effects and the collapse of temporary fixed-exchange-rate regimes in an unified framework, and provides an economic interpretation for the evidence that foreign reserves are a robust leading indicator of currency crises.

Foreign reserve strategies for emerging economies - before and after the crisis

The global financial crisis posed as much of a challenge for the foreign exchange reserve policies of emerging countries as it did for their economic policies and financial systems. This pushed many countries into rethinking their strategies about foreign exchange reserves. This study presents the main objectives behind reserve accumulation by central banks, and summarises the considerations generally taken into account when defining the targeted level of foreign reserves. We also review the motives that led the majority of emerging countries to accumulate large-scale reserves in the period preceding the crisis. Many lessons can be drawn from the crisis about the level and use of reserves, and the possibilities for increasing reserves in times of turmoil. The lessons deemed most important by us, together with the foreign reserve trends of the post-crisis period are presented in the second part of this study. Based on our conclusions, international reserves are likely to increase further. This increase may generate further tensions in the global financial system, despite the fact that higher reserve levels may, on the level of individual countries, be a rational choice. To avoid global imbalances, international coordination and alternative sources of FX liquidity, such as central bank swap lines, new IMF instruments and regional financial solutions - vital in times of crisis - should be reinforced.foreign reserves, international reserves, swap lines, financial safety net.

Interest Rate Smoothing and Macroeconomic Instability under Post-Capital Account Liberalization Turkey

This Working Paper studies how the interest rate policy of the Central Bank of the Republic of Turkey (CBRT) has evolved under the post-financial liberalization and deregulation era. Utilizing econometric methods on a generalized form of a Taylor Rule the authors search for the possible revelation of a variety of determinants of monetary policy with different objectives over 1994-2007. They find that over such an extended time horizon during which significant shifts in the macroeconomic environment have occurred, the CBRT’s almost exclusive focus on “interest rate smoothing” has not changed; and that the CBRT has not paid any attention to developments in national income. <p></p> This raises the question whether there is a deeper underlying structural constraint, binding the CBRT’s alleged “independence”. The authors trace the basics of this deep structural constraint to the nature of the global financial system restricting the ability of the central banks to pursue “independent” policy objectives.

Panel discussion

"The Importance of Being Predictable" by John B. Taylor -- "Monetary Policy Under Uncertainty" by Ben S. Bernanke -- "The Importance of Being Predictable" by William PooleMonetary policy

The Development and Failure of Social Norms in Second Life

This Note analyzes the development and efficacy of social norms in maximizing the welfare of participants in the virtual community of Second Life. Although some of these norms developed appropriately in response to the objectives and purposes of this virtual world, Second Life is so thoroughly steeped in conditions that have impeded the development of successful social norms in other communities that any system of social norms in Second Life will ultimately fail. Because social norms will likely,fail to successfully maximize resident welfare, regulatory schemes imposed both by the operators of the virtual world and by real-world governing institutions are needed to enhance the functioning of this particular alternative reality inhabited by millions

The Development and Failure of Social Norms in Second Life

This Note analyzes the development and efficacy of social norms in maximizing the welfare of participants in the virtual community of Second Life. Although some of these norms developed appropriately in response to the objectives and purposes of this virtual world, Second Life is so thoroughly steeped in conditions that have impeded the development of successful social norms in other communities that any system of social norms in Second Life will ultimately fail. Because social norms will likely,fail to successfully maximize resident welfare, regulatory schemes imposed both by the operators of the virtual world and by real-world governing institutions are needed to enhance the functioning of this particular alternative reality inhabited by millions

Choosing the currency structure for sovereign debt : a review of current approaches

This paper acknowledges the fact that some countries have to borrow in foreign currencies due to the various constraints they face. Starting from this point, the author reviews approaches for trying to determine the currency structure for sovereign debt, and discusses some issues inherent in these approaches. The analysis mainly focuses on the correlations of domestic fundamentals with the actual versus equilibrium exchange rate in light of the long-term perspective of a debt manager and changing exchange rate regimes. In addition, the author makes some observations on the characterization of exchange rate volatilities in the existing approaches.Economic Theory&Research,External Debt,Financial Intermediation,Strategic Debt Management,Foreign Direct Investment

Methods of Analysis and Evaluation of the Bankruptcy Risk

The profitableness of an enterprise cannot be appreciated irrespective of the risks wherewith this is confronting, risks corresponding to economic and financial profitableness: the economic risk, carried out into organizational lever effect and the financial risk, in terms of the negative lever. The financial lever deepens the economic risk, turning into a greater vulnerability of treasury (to the outgoings concerning the interest, those of loan’s reimbursement are added), which finally generates the enterprise’s inability of payment, meaning the bankruptcy risk.Profitableness, risk, bankruptcy, analysis, evaluation